bobmoore wrote:But what is it people don't like? I think the allocation and fees are good. And I wouldn't need to take the full distribution every year.
There are two problems to solve in retirement: 1) How to allocate one's portfolio, and 2) How much to withdraw every month to meet expenses.
If the size of the portfolio is, say, 40 or 50 times your desired withdrawal, then everything is easy. You can, in fact, probably live off dividends and interest alone without "invading the principal," and, quite possibly, having the principal grow fast enough to hold real value.
The problem only arises if you feel the need to squeeze more. One possible approach is annuitization, but that has a set of issues all its own. Another is to seek a combination of a portfolio and a withdrawal rate that lets you withdraw as much as possible
, yet run a negligible risk of "portfolio exhaustion."
If you just want to regard the Managed Payout funds as a package of assets--an actively-managed package of assets--an aggressively-invested, actively-managed package of assets, and manage the withdrawals yourself, and you know exactly what you are getting, then there is nothing at all wrong with it. It's just another active fund. You could compare it to Wellington or whatever. It's just not particularly Bogleheadish, so you shouldn't expect much enthusiasm.
The stronger negative opinion arises because the Managed Payout funds are not
presented simply as mutual funds, they are presented as a solution to a problem--using a portfolio to support retirement spending. The whole point is that you don't manage the payouts yourself, the fund does. You can go back and forth titrating the actual promises made in the Prospectus (none whatsover) against the implications made in the marketing material against the inference that people read in. But I think that it is very reasonable to say that the fund sets an expectation
. Those expectations were, in fact, once stated as "management goals" in the prospectus but I believe they may have dropped them recently.
This is how I think the funds are presented by Vanguard.
Am I being unfair?
a) Vanguard sets an expectation that you can
spend the distributions from the Growth and Distribution fund every month, and still have the portfolio maintain real value (grow as fast as inflation) over the long run. What the portfolio lost in 2008-9 it will, it is assumed, earn back someday when the economy recovers fully, and the managed payouts are not so big as to prevent that from happening.
b) Those payouts will fluctuate annually, but by tolerable amounts; you can use them as an income stream to meet monthly expenses, there will be good years and bad years, but nothing you can't adapt to.
c) The payouts will approximate 5% of the real value of the amount you initially invested. This is very important, because it is higher
than the traditional 4% rule-of-thumb.
d) The high value of 5% is made possible by two factors: the fact that the payout are allowed to fluctuate, and the fact that it has an unusually aggressive allocation for a retirement fund. The reason why the aggressive allocation is supposed to be OK is that these funds use the same diversification principals that college endowments use to minimize risk.
The point is--and the reason why I find them troublesome--is that their whole appeal is that 5% number. We've all read the SWR stuff, we all know that if we were content with 3.5% or 4% we could just use Wellington or Wellesley or Target Retirement Income or something.
The whole premise of the Managed Payout funds is that you can get a) more, b) safely than you can with the boring old traditional approaches. This is the premise I am skeptical about.
Nobody put a gun to Vanguard's head and said "Set the payouts (for Growth & Distribution) at 5%." They picked that number themselves. To say "That's not a problem because I'll only use 4% and reinvest the rest" is like saying it's not a problem that an iPhone drops calls when you hold it a certain way because you don't hold it that way.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.