Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

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GaryA505
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Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by GaryA505 » Fri Jun 30, 2017 5:58 pm

So, I'm studying various fund portfolios, among them Vanguard Target Date 2015 (VTXVX) and Managed Payout (VPGDX).

What I'm wondering is this. These funds seem to have the same objective, which is retirement income. So why are the portfolios so different? The obvious reason is that they are both making bets on the market's future behavior, and nobody knows the future, but shouldn't there be at least some convergence of market predictions and asset allocation approaches?

If this is a dumb question, please explain why.

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nisiprius
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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by nisiprius » Fri Jun 30, 2017 6:24 pm

It's a very complicated and interesting question.

A traditional retirement income fund, like Wellesley or Target Date Income, holds a conservative portfolio that is mostly bonds so that both the dividend payments from the fund and the value of the fund are relatively stable.

Managed Payout is an unusual, innovative fund--an innovation that has not been very well received or imitated by other mutual fund companies. Originally there were three different Managed Payout funds and they apparently didn't accumulate assets as quickly as Vanguard wanted, so they merged the three into one. The "GD" in ticker symbol VPGDX stand for "growth and distribution." There was originally also a "growth oriented" and a "distribution oriented" fund.

The big thing about Managed Payout is that it tries to provide stable monthly income, not by investing in conservative securities, but by using a three-year moving-average payout system. The payouts average through the ups and downs of the fund. When the fund is down, the payouts will sell assets, dip into capital, to maintain steady payouts. When the fund is up, it will not increase payouts but will use the extra to buy more assets. The idea, target, goal, hope is that over the long term the fund can make up during good periods for the drawdown of assets that occur during the bad periods.

The availability of this smooth mechanism sets the fund managers free to invest more aggressively, in hope of getting higher returns, than traditional retirement income funds.

The portfolio is uncharacteristic of Vanguard's staid, traditionalist approach and uses many of the principles used by the Yale endowment fund and popularized by David F. Swensen in his books. In theory, despite the high stock allocation, risk is partly mitigated by the use of alternative investments with low correlation. The fund is actively managed and the general composition of the fund's portfolio has changed a bit from year to year. It includes an allocation to the Vanguard Alternative Strategies Fund, which you won't find anywhere on the personal investing website.

When I say it hasn't been well received, what I mean is that the fund is now about eight years old but has only accumulated $1.9 billion in assets. Compare that to your Target Retirement 2015, $17.4 billion. Vanguard was unlucky with their timing. Remember that it is more aggressive than traditional retirement funds (and thus fell further in 2008-2009), and that it relies on "return of capital" (selling off shares) when their value dips. 2008-2009 was a severe test of this strategy, and it didn't do too well. Originally, VPGDX had a 5% "target"--the payout formula was centered around 5%-of-portfolio per year. In 2013 when they merged the three funds, they also cut back the payout target from 5% to 4%. That is, the central payout rate around which the payouts fluctuated, according to the 3-year-moving-average formula, were reduced by 20%.

In my own personal biased poorly-informed opinion, this is relatively wild-and-wooly stuff that's not at all characteristic of Vanguard, and hits all the currently fashionable buzzwords. I really dislike the portfolio. On the other hand, it's not at all impossible that one day I might cave and buy it anyway because of the convenient and clever payout mechanism. In the forum, most of the people who've said they bought this fund weren't using it for retirement income at all, they were using it because they liked the portfolio strategy, they wanted a "Yale-endowment-style" portfolio.
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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by TropikThunder » Fri Jun 30, 2017 8:01 pm

nisiprius wrote: The "GD" in ticker symbol VPGDX stand for "growth and distribution."
That's funny, I thought the "GD" referred to something else. :twisted:
nisiprius wrote: In the forum, most of the people who've said they bought this fund weren't using it for retirement income at all, they were using it because they liked the portfolio strategy, they wanted a "Yale-endowment-style" portfolio.
The problem is an "endowment-style" portfolio style really only works well for something with a lifespan longer than a person's lifetime (same with long-term bonds. It's an interesting side-note to the dividends debate, a real-life example of a sustained withdrawal strategy that explicitly supplements dividends/interest with return of capital to maintain the payout.

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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by GaryA505 » Sat Jul 01, 2017 12:59 am

TropikThunder wrote: The problem is an "endowment-style" portfolio style really only works well for something with a lifespan longer than a person's lifetime (same with long-term bonds. It's an interesting side-note to the dividends debate, a real-life example of a sustained withdrawal strategy that explicitly supplements dividends/interest with return of capital to maintain the payout.
It that's true, then how can Managed Payout allow for 4% distributions indefinitely. Or, are you saying it can't. What has the actual payout been? It's been around since May 2008, so what was the payout during the crash?

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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by Snowjob » Sat Jul 01, 2017 8:41 am

GaryA505 wrote:
TropikThunder wrote: The problem is an "endowment-style" portfolio style really only works well for something with a lifespan longer than a person's lifetime (same with long-term bonds. It's an interesting side-note to the dividends debate, a real-life example of a sustained withdrawal strategy that explicitly supplements dividends/interest with return of capital to maintain the payout.
It that's true, then how can Managed Payout allow for 4% distributions indefinitely. Or, are you saying it can't. What has the actual payout been? It's been around since May 2008, so what was the payout during the crash?
Of course it can sustain 4% indefinitely -- its not 4% adjusted for inflation blindly into the future regardless of assets. Its 4% of the 3 year average of asset value. Basically your distributions can go down if market returns suck during your life, and on the other side they can go up faster than inflation if market returns are better.

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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by Oicuryy » Sat Jul 01, 2017 10:37 am

GaryA505 wrote:What has the actual payout been? It's been around since May 2008, so what was the payout during the crash?
By my calculations, here is how the payout changed from the previous year.

Code: Select all

2009 -16.1%
2010  -9.3%
2011  +2.1%
2012  +1.9%
2013  +6.8%
2014 -16.9%
2015  +6.3%
2016  +4.3%
2017  +1.2%
Vanguard did not use any smoothing to calculate the 2008 payout. The 2009 payout was calculated from only eight months of smoothing data. I believe the reductions in payouts in the early years would have been smaller if a full three years of data had been used in the smoothing formula.

The drop in the 2014 payout was due to changing the rate from 5% to 4% in the payout formula.

The Managed Payout portfolio is unusual. But its total return closely tracks the total return of Vanguard's Life Strategy Moderate Growth fund. See this Morningstar chart.
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

IMO, the biggest risk to the payout from the MP fund is Vanguard messing with the payout formula.

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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by FactualFran » Sat Jul 01, 2017 11:53 am

GaryA505 wrote:It that's true, then how can Managed Payout allow for 4% distributions indefinitely. Or, are you saying it can't. What has the actual payout been? It's been around since May 2008, so what was the payout during the crash?
Here is a table of the sum of the monthly payouts during each year of a hypothetical $10,000 account established at the end of 2008.

Code: Select all

2009	$613
2010	$556
2011	$568
2012	$578
2013	$618
2014	$513
2015	$545
2016	$569
The regular monthly payouts were taken in cash. The addition distribution made at the end of some of the years was reinvested. At the end of 2016 the account balance would have been $14,406.

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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by GaryA505 » Sun Sep 10, 2017 11:42 pm

FactualFran wrote:
Sat Jul 01, 2017 11:53 am
GaryA505 wrote:It that's true, then how can Managed Payout allow for 4% distributions indefinitely. Or, are you saying it can't. What has the actual payout been? It's been around since May 2008, so what was the payout during the crash?
Here is a table of the sum of the monthly payouts during each year of a hypothetical $10,000 account established at the end of 2008.

Code: Select all

2009	$613
2010	$556
2011	$568
2012	$578
2013	$618
2014	$513
2015	$545
2016	$569
The regular monthly payouts were taken in cash. The addition distribution made at the end of some of the years was reinvested. At the end of 2016 the account balance would have been $14,406.
This thing is paying out 5%/year and the balance is still increasing by 5%/year?

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nisiprius
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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by nisiprius » Mon Sep 11, 2017 7:11 am

It's not paying out 5% per year. It's targeting 4% per year.

Managed Payout, like all systematic withdrawal plans including the "4% safe withdrawal rate," variable percentage withdrawals, Guyton-Klinger, what have you, is a reasonable gamble.

Like all variable withdrawal plans, the nature of the gamble becomes difficult to evaluate, because the risk is no longer "portfolio exhaustion" (drawing the portfolio down to zero), it is a risk that the withdrawal rules will result in unpleasant or unacceptable fluctuations--in particular unpleasant or unacceptable cuts. To take a ridiculous example, you can spend 50% of your portfolio every year and never run out of money. But your monthly withdrawals might be pocket change.

Deciding to use Managed Payout rather than a traditional retirement fund is a decision that you prefer to gamble on the total earnings produced by a more aggressive, higher-risk, and hopefully higher-returning-on-average portfolio, and deal with the volatility by Vanguard's three-year-moving-average smoothing.

In the original "safe withdrawal rule" 4% studies, it was assumed that you would simply index your withdrawals for inflation, based on a calculation from the CPI, and see whether you ran out of money as a result. Managed Payout does not explicitly tie the payouts to inflation in any way; based on the judgement (and perhaps-unpublished internal studies?) of the fund managers, they hope that after making the payouts, there will be enough left so that the fund capital will, in the long run, tend to keep up with inflation. That is to say: without any withdrawals, a portfolio is expected to have a positive real return; Vanguard pays out withdrawals and hopes that the unspent part of the portfolio will grow with zero real return in the long run.

Although I wondered out loud above whether the original 5% target rate had been justified by unpublished internal studies, I have to say that I doubt it--I think both the 5% and the cut to 4% were seat-of-the-pants. I base this on the language used by John Ameriks in 2014, in which he mentioned the cut from 5% to 4% and justified the 4%, not on the basis of studies, but on the fact "The concept of the '4% spending rule' has been around for a long time."
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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by FactualFran » Mon Sep 11, 2017 1:50 pm

GaryA505 wrote:
Sun Sep 10, 2017 11:42 pm
This thing is paying out 5%/year and the balance is still increasing by 5%/year?
Yes, the Vanguard Managed Payout fund has been paying out at least 5% on an investment made at the end of 2008. As of the end of 2016, the balance of the account would have been 5%/year greater than the balance at the end of 2008, when rounding to the nearest percent. Stated to a few more decimal places, the balance at the end of 2016 corresponds to an annualized increased of 4.67%.

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Re: Vanguard Target Date 2015 vs Managed Payout - Is this a dumb question?

Post by tj » Wed Sep 13, 2017 3:17 pm

GaryA505 wrote:
Sun Sep 10, 2017 11:42 pm
FactualFran wrote:
Sat Jul 01, 2017 11:53 am
GaryA505 wrote:It that's true, then how can Managed Payout allow for 4% distributions indefinitely. Or, are you saying it can't. What has the actual payout been? It's been around since May 2008, so what was the payout during the crash?
Here is a table of the sum of the monthly payouts during each year of a hypothetical $10,000 account established at the end of 2008.

Code: Select all

2009	$613
2010	$556
2011	$568
2012	$578
2013	$618
2014	$513
2015	$545
2016	$569
The regular monthly payouts were taken in cash. The addition distribution made at the end of some of the years was reinvested. At the end of 2016 the account balance would have been $14,406.
This thing is paying out 5%/year and the balance is still increasing by 5%/year?
Have you reduced the payouts by the return of capital?

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