Vanguard Managed Payout Fund

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LXEX55
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Vanguard Managed Payout Fund

Post by LXEX55 » Thu Jun 14, 2018 6:21 pm

I was reading about it on their website. Does anyone have any experience with it, or strong feelings either way?

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David Jay
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Re: Vanguard Managed Payout Fund

Post by David Jay » Thu Jun 14, 2018 6:30 pm

What are your financial goals that lead you in this direction? Are you comfortable that they will pay out principle if needed to maintain the income stream?
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lack_ey
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Re: Vanguard Managed Payout Fund

Post by lack_ey » Thu Jun 14, 2018 7:23 pm

It's an actively managed balanced fund engaging in some mild-moderate market timing but generally staying on the aggressive side for what is kind of intended as a retirement inccome vehicle, typically owning something like 60% stocks. Most of what it owns is index funds, but with some tilts here and there and some other funds, plus a range of alternatives in addition to fixed income as diversifiers. That includes commodities (futures), a multialternatives fund, and an equity market neutral fund, all of which follow asset exposures or strategies that are somewhat in the mainstream but not really a favorite of a lot of people here. Given the presence of the alternatives, it can be vaguely likened to some kind of institutional portfolios to an extent.

It pays out a monthly distribution that generally includes some return of capital, with the amount being adjusted every once in a while but in most months the same as the previous and the next. That's a convenience function that some would appreciate, I suppose, though selling mutual funds yourself is rather simple these days.

Overall it's defensible and in the realm of reasonable enough. I can't say I'm the hugest fan but i don't have much of anything against it. Some don't like that they've added funds to it over the years and play around with the composition but it doesn't seem like a negative to me.

It's been discussed a lot previously so if you just want to read opinions, search for older threads.

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Sandtrap
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Re: Vanguard Managed Payout Fund

Post by Sandtrap » Thu Jun 14, 2018 7:33 pm

If you are seriously considering the Vanguard Managed Payout Fund, also look into SPIA's at "ImmediateAnnuity.com" to compare rates. This gives a different perspective.
j

Dottie57
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Re: Vanguard Managed Payout Fund

Post by Dottie57 » Thu Jun 14, 2018 8:24 pm

Sandtrap wrote:
Thu Jun 14, 2018 7:33 pm
If you are seriously considering the Vanguard Managed Payout Fund, also look into SPIA's at "ImmediateAnnuity.com" to compare rates. This gives a different perspective.
j
+1

LXEX55
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Re: Vanguard Managed Payout Fund

Post by LXEX55 » Thu Jun 14, 2018 8:36 pm

lack_ey wrote:
Thu Jun 14, 2018 7:23 pm
It's an actively managed balanced fund engaging in some mild-moderate market timing but generally staying on the aggressive side for what is kind of intended as a retirement inccome vehicle, typically owning something like 60% stocks. Most of what it owns is index funds, but with some tilts here and there and some other funds, plus a range of alternatives in addition to fixed income as diversifiers. That includes commodities (futures), a multialternatives fund, and an equity market neutral fund, all of which follow asset exposures or strategies that are somewhat in the mainstream but not really a favorite of a lot of people here. Given the presence of the alternatives, it can be vaguely likened to some kind of institutional portfolios to an extent.

It pays out a monthly distribution that generally includes some return of capital, with the amount being adjusted every once in a while but in most months the same as the previous and the next. That's a convenience function that some would appreciate, I suppose, though selling mutual funds yourself is rather simple these days.

Overall it's defensible and in the realm of reasonable enough. I can't say I'm the hugest fan but i don't have much of anything against it. Some don't like that they've added funds to it over the years and play around with the composition but it doesn't seem like a negative to me.

It's been discussed a lot previously so if you just want to read opinions, search for older threads.
Thank you for you detailed answer, and of course your time. May I ask, since this is coming from an IRA account, do they automatically deduct taxes each month?

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cfs
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Re: Vanguard Managed Payout Fund

Post by cfs » Thu Jun 14, 2018 8:54 pm

If you search Morningstar bucket strategy for Vanguard investors this fund is recommended by Miss Benz. Your money, your portfolio, your decision. Good luck y gracias por leer / cfs
~ Member of the Active Retired Force since 2014 ~

lack_ey
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Re: Vanguard Managed Payout Fund

Post by lack_ey » Thu Jun 14, 2018 9:28 pm

LXEX55 wrote:
Thu Jun 14, 2018 8:36 pm
Thank you for you detailed answer, and of course your time. May I ask, since this is coming from an IRA account, do they automatically deduct taxes each month?
Vanguard can automatically withhold a set percentage of distributions from a Vanguard IRA account for taxes. Other platforms frequently have similar features. That's a figure you specify and may not be exactly right in the end.

MrPotatoHead
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Re: Vanguard Managed Payout Fund

Post by MrPotatoHead » Fri Jun 15, 2018 1:26 am

Something you might want to be aware of is in the past Vanguard has had to cut the monthly income payouts. For example on January 15th of 2010 Vanguard cut the monthly income payouts by more than 9%. At that point in time (Jan 2010) the payouts on its funds were down between 23 and 25.5% since inception!!!

I culled that information from the following URL:

https://investorplace.com/2010/02/vangu ... r-promise/

I remember a lot of folks being pretty upset at the time, because many mistakenly believed managed payout funds were a smarter annuity substitute.

Given the demonstrated reality of what can happen (an income cut) I would at a investigate other approaches.

One approach is to look at base lining your expense off of SS and an annuity and then investing the rest. The idea is to get around three of thee issues with annuities:
- inflation
- loss of control of your assets (you may get hit with a large expense that cannot be covered by you monthly annuity check.
- loss of a legacy to pass down

Another approach is to base expenses on SS and a TIP ladder and invest the remainder.

Either of these approaches should work fairly well as long as SS cover at least half of your expenses.

I prefer the idea of base lining your expenses with SS and a CD ladder that you adjust for assumed inflation every 5 years(in a lump sum) and invest the remainder. Once again if social security comes in at about half your assets this should work out very well. The reason I prefer it is when you adjust for inflation every 5 years, verses every year (on the portion in you CDs, since SS is automatically adjusted for you) you give your money a little bit longer to work, aka appreciate. This gives you a fairly decent shot at increasing your legacy.

Cheers...

jalbert
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Re: Vanguard Managed Payout Fund

Post by jalbert » Fri Jun 15, 2018 2:01 am

I find this fund very interesting as an investment portfolio, but I don’t understand the rational of the portfolio Vanguard designed as a managed payout fund. It was designed by the Vanguard quantitative group, so I’m sure substantial analyses went into the design.

To me, this is a portfolio that looks like an institutional portfolio of a large charity or university endowment, complete with alternative assets and a design likely based on modern portfolio theory. If you reinvest distributions, it could function as an investment portfolio to support asset growth.

It is doubtful I would want to use it though, as I don’t prefer to take active management risk with complex products whose design method is not transparent.

As far as return of principal is concerned, it would be odd if a managed payout fund didn’t sometimes return principal. SPIAs certainly don't preserve principal.

You can just hold a balanced fund like a LifeStrategy fund, Target Retirement Income, or the balanced index fund (US equity only) and take RMDs.
Last edited by jalbert on Sat Jun 23, 2018 1:00 pm, edited 1 time in total.
Risk is not a guarantor of return.

grok87
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Re: Vanguard Managed Payout Fund

Post by grok87 » Fri Jun 15, 2018 7:02 am

Agree with the comments above

Perhaps worth posting the funds current asset allocation.
Vanguard seems to monkey with this a lot.
Currently they have raised the international stocks and commodities.

Vanguard Total International Stock Index Fund Investor Shares 24.80%
Vanguard Total Bond Market II Index Fund Investor Shares** 14.10%
Vanguard Alternative Strategies Fund** 12.60%
Vanguard Total Stock Market Index Fund Investor Shares 12.50%
Commodities 7.50%
Vanguard Global Minimum Volatility Fund Investor Shares 7.50%
Vanguard Total International Bond Index Fund Investor Shares 6.10%
Vanguard Market Neutral Fund Investor Shares 5.00%
Vanguard Value Index Fund Investor Shares 5.00%
Vanguard Emerging Markets Stock Index Fund Investor Shares 4.90%
100.00%

Some comments:
I think one can invest in all of these exact funds oneself with the exception of the commodities (not sure what vanguard does here, credit suisse custom 34?) and vanguard alternative strategies fund (vasfx).

You are getting investor class shares- ughh!

I tend to classify commodities as “alternatives” myself so I would say this fund is 55 stocks, 20 bonds, 25 alts.
That’s interesting to me as I currently target 50/25/25 for my Risk portfolio.

My big questions are why no real estate and why no tips?
Cheers
Grok
Keep calm and Boglehead on. KCBO.

aristotelian
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Re: Vanguard Managed Payout Fund

Post by aristotelian » Fri Jun 15, 2018 8:27 am

Just do Lifestrategy Growth and withdraw 4% a year at a much lower expense ratio. I don't know why you would pay extra just to have them withdraw 4% for you. They do not guarantee the principal so it is no safer than the underlying funds. It is not an annuity.

dbr
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Re: Vanguard Managed Payout Fund

Post by dbr » Fri Jun 15, 2018 9:07 am

I can't see any reason why the average retirement investor would want to own that fund. To the extent it is represented as a superior choice for supplying retirement income, that would be a misrepresentation. If someone wants to hold the fund to get that unique investment allocation, then it exists as a choice. I think a look at the fund asset base would suggest investors are not impressed.

LXEX55
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Re: Vanguard Managed Payout Fund

Post by LXEX55 » Fri Jun 15, 2018 9:40 am

But just to clarify, one final question: I can get out of this fund anytime I want, right? In other words, if I don't like the payouts or reduction in principal, I can just switch the funds to an index fund or something.....correctomundo?

grok87
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Re: Vanguard Managed Payout Fund

Post by grok87 » Fri Jun 15, 2018 9:43 am

LXEX55 wrote:
Fri Jun 15, 2018 9:40 am
But just to clarify, one final question: I can get out of this fund anytime I want, right? In other words, if I don't like the payouts or reduction in principal, I can just switch the funds to an index fund or something.....correctomundo?
Yep
Keep calm and Boglehead on. KCBO.

dbr
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Re: Vanguard Managed Payout Fund

Post by dbr » Fri Jun 15, 2018 9:55 am

LXEX55 wrote:
Fri Jun 15, 2018 9:40 am
But just to clarify, one final question: I can get out of this fund anytime I want, right? In other words, if I don't like the payouts or reduction in principal, I can just switch the funds to an index fund or something.....correctomundo?
Yes, but if it is in a taxable account there will be a capital loss or gain that goes to your income tax return, for better or for worse.

BrooklynInvest
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Re: Vanguard Managed Payout Fund

Post by BrooklynInvest » Fri Jun 15, 2018 10:49 am

aristotelian wrote:
Fri Jun 15, 2018 8:27 am
Just do Lifestrategy Growth and withdraw 4% a year at a much lower expense ratio. I don't know why you would pay extra just to have them withdraw 4% for you. They do not guarantee the principal so it is no safer than the underlying funds. It is not an annuity.
Yeah. This was what I was struggling with. Love the idea of the product but couldn't see how admittedly a more complex AA was getting me (give or take) 20+ bps of value versus a Lifestrategy.

aristotelian
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Re: Vanguard Managed Payout Fund

Post by aristotelian » Fri Jun 15, 2018 10:56 am

BrooklynInvest wrote:
Fri Jun 15, 2018 10:49 am
Yeah. This was what I was struggling with. Love the idea of the product but couldn't see how admittedly a more complex AA was getting me (give or take) 20+ bps of value versus a Lifestrategy.
I don't even love the idea of the product.

lack_ey
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Re: Vanguard Managed Payout Fund

Post by lack_ey » Fri Jun 15, 2018 11:54 am

BrooklynInvest wrote:
Fri Jun 15, 2018 10:49 am
Yeah. This was what I was struggling with. Love the idea of the product but couldn't see how admittedly a more complex AA was getting me (give or take) 20+ bps of value versus a Lifestrategy.
The quoted expense ratio is 0.34% but 0.12% of that just reflects borrowing and dividend costs on short sales for two underlying funds. That's part of the cost of the strategy more so than being a management or administrative fee, part of the "actual" ER. It's weird to me how these costs get lumped into the expense ratio at times even though other brokerage-type costs and frictions from running a portfolio are not. Morningstar generally does not include those costs as part of the ER when looking at funds, though they don't correct for this for fund-of-funds holdings. (Morningstar lists 0.22% rather than 1.54% for VMNFX for example)

So the expense ratio difference is more like 10 bp. And that's with Managed Payout currently tilting to international stock funds, which are more expensive.

As such I think there's not all that much to argue when it comes to cost. Certainly you can disagree with the fund's strategies and holdings.

jalbert
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Re: Vanguard Managed Payout Fund

Post by jalbert » Fri Jun 15, 2018 12:58 pm

My big questions are why no real estate and why no tips?
I would tend to guess they got a zero weight by their model as opposed to being excluded from the investable domain of the model.

What I think is interesting about the portfolio for an individual investor is what grok was just pointing out, i.e. that it is diversifying equity risk with 20% bonds and 25% alts. If the diversification works then it might offer a superior strategy to a pure stock/bond portfolio given low current interest rates.

But the track record of the fund provides a thought of “what’s the big deal with all that fancy stuff anyway?”. Comparing to LifeStrategy Moderate which is 60% stock, 40% bonds with sizable allocations both to int’l equities and bonds:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Managed payout had a slightly higher return and slightly lower max drawdown, but more volatility and a lower sharpe ratio since Jan 2009.
Risk is not a guarantor of return.

rj49
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Re: Vanguard Managed Payout Fund

Post by rj49 » Fri Jun 15, 2018 5:02 pm

If you look at the history of the fund, they frequently change the portfolio make-up because of what they see as market inefficiencies, which in practice can also be seen as performance chasing and market timing. So you'd never know that what you bought wouldn't suddenly change, and you have to deal with significant manager risk. They try to replicate an endowment fund with trendy features like commodities and hedging, trying to be a David Swensen/Yale lite fund, so investors believe their holdings will grow forever and never lose value (thus the fake reassurance of market neutral funds and other hedges). Yet the fund lost much of its value right at its inception, because it was launched just before the 2007 crash, so early investors had the indignity of seeing their holdings cut in half while being locked into selling at lower and lower prices.

While it may seem convenient to have them send a monthly check, if the market is going down (which it will do eventually), it means you're selling low, when if you simply had a diversified portfolio, in a market crash you could sell from a bond fund or cash and allow your stocks to hopefully recover. It may seem like a supercharged annuity after a long bull market, but if the market falls they'll be selling your principal and eventually the 3-year average they use to compute payouts would decrease as well, so you'd get a lower monthly payout, something an annuity wouldn't do.

Finally, the fund has meager assets (they had to combine 3 funds with different payouts to make it seem like a respectable fund), which will fall even more if there's a bear market and investors get panicked over selling in a falling market. If you want a monthly payout, then you could simply take a monthly or yearly 4% out of a target retirement fund or a balanced fund, or if you're really risk-averse, take the 3% or so dividends of Wellesley and then sell 1% of shares every year.

jalbert
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Re: Vanguard Managed Payout Fund

Post by jalbert » Fri Jun 15, 2018 7:02 pm

If you look at the history of the fund, they frequently change the portfolio make-up because of what they see as market inefficiencies, which in practice can also be seen as performance chasing and market timing.
It is actively managed. The portfolio change associated with any active management decision occurs at some point in time and thus is subject to timing risk. I seriously doubt that they are performance chasing.
Risk is not a guarantor of return.

UncleVester
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Re: Vanguard Managed Payout Fund

Post by UncleVester » Fri Jun 15, 2018 8:05 pm

You won't find many fans here, but I bought about $100,000 worth of VPGDX. I like it. Don't go by the long term track record either. It's a different fund than what was launched 10 years ago. I have been investing my whole life but as I get older I want to spend less time paying attention to it. Soon I will begin the withdrawal period from my saving and I really don't want to make the decision of what to sell and when. Trim bonds? Use dividends? Cash some REITS? Let them figure it out. It's not a large part of my holdings, but I think there's a lot of value in sitting back and collecting the check every month, whether it's return of principal or whatever.

shariron
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Re: Vanguard Managed Payout Fund

Post by shariron » Fri Jun 15, 2018 9:00 pm

In my opinion, Managed Payout was a “gimmicky” idea to begin with and its track record suggests nothing to change my mind. I believe Wellington, Wellesley, Balanced Index, Lifestrategy/Target Date lineups and Star are ALL superior balanced fund alternatives.

bltn
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Re: Vanguard Managed Payout Fund

Post by bltn » Fri Jun 15, 2018 10:00 pm

I invested in the 4% Managed Payout Fund in my IRA about 5 years ago. The payouts were placed in a money market account. The balance grew modestly over that 5 year period. I thoght that might represent keeping up with modest inflation.
Last year when I rolled that ira , along with several other accounts over to Vanguard, I was given a financial plan by Vanguard. The planner recommeneded selling the the Managed Payuor position and replacing it with the VTI fund.
I thought that was interesting. Vanguard recommending a plain vanilla stock index fund to me over a version of their asset allocation fund.

grok87
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Re: Vanguard Managed Payout Fund

Post by grok87 » Sat Jun 16, 2018 7:18 am

UncleVester wrote:
Fri Jun 15, 2018 8:05 pm
You won't find many fans here, but I bought about $100,000 worth of VPGDX. I like it. Don't go by the long term track record either. It's a different fund than what was launched 10 years ago. I have been investing my whole life but as I get older I want to spend less time paying attention to it. Soon I will begin the withdrawal period from my saving and I really don't want to make the decision of what to sell and when. Trim bonds? Use dividends? Cash some REITS? Let them figure it out. It's not a large part of my holdings, but I think there's a lot of value in sitting back and collecting the check every month, whether it's return of principal or whatever.
thanks and welcome to the forum.

I like the concept of the managed payout fund. but as other posters have pointed out its asset allocation is pretty actively managed which i don't like.
Keep calm and Boglehead on. KCBO.

grok87
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Re: Vanguard Managed Payout Fund

Post by grok87 » Sat Jun 16, 2018 7:43 am

rj49 wrote:
Fri Jun 15, 2018 5:02 pm
If you look at the history of the fund, they frequently change the portfolio make-up because of what they see as market inefficiencies, which in practice can also be seen as performance chasing and market timing. So you'd never know that what you bought wouldn't suddenly change, and you have to deal with significant manager risk. They try to replicate an endowment fund with trendy features like commodities and hedging, trying to be a David Swensen/Yale lite fund, so investors believe their holdings will grow forever and never lose value (thus the fake reassurance of market neutral funds and other hedges). Yet the fund lost much of its value right at its inception, because it was launched just before the 2007 crash, so early investors had the indignity of seeing their holdings cut in half while being locked into selling at lower and lower prices.

While it may seem convenient to have them send a monthly check, if the market is going down (which it will do eventually), it means you're selling low, when if you simply had a diversified portfolio, in a market crash you could sell from a bond fund or cash and allow your stocks to hopefully recover. It may seem like a supercharged annuity after a long bull market, but if the market falls they'll be selling your principal and eventually the 3-year average they use to compute payouts would decrease as well, so you'd get a lower monthly payout, something an annuity wouldn't do.

Finally, the fund has meager assets (they had to combine 3 funds with different payouts to make it seem like a respectable fund), which will fall even more if there's a bear market and investors get panicked over selling in a falling market. If you want a monthly payout, then you could simply take a monthly or yearly 4% out of a target retirement fund or a balanced fund, or if you're really risk-averse, take the 3% or so dividends of Wellesley and then sell 1% of shares every year.
The reference to David Swensen is interesting. One can ask the question, if David Swensen were running Vanguard's managed payout fund what would it look like? The answer is actually given implicitly in his book Unconventional Success.

Many bogleheads will know David Swensen's recommended portfolio:
30% US Stocks
25% International Stocks
15% Real Estate
15% Treasuries
15% TIPs

what some may not realize is that this is his "long term" portfolio for horizon's 10 years or greater. For payments needed in 2 years or less he recommends being 100% in cash. And for years in between he says you should interpolate. For example for a payment needed in 6 years you would be 50% in the long term portfolio and 50% in cash (since 6 years is halfway between 2 years and 10 years).

If you work this out with a 4% annual payout assumption you get to this implied David Swensen Managed Payout portfolio:

Cash 22%
Global Stocks 42.75%
Reits 11.75%
Treasuries 11.75%
TIPS 11.75%

If you reframe this in the stocks/bonds/alts framework (considering cash as bonds and Reits as alts) you get:

Swensen
Stocks 42.75%
Bonds 45.5%
Alts 11.75%

By contrast the Vanguard Managed Payout fund is currently
Stocks 55%
Bonds 20%
Alts 25%

so i think the takeaway is that the Vanguard Managed Payout fund is actually fairly aggressive in its asset allocation.
Last edited by grok87 on Sat Jun 16, 2018 8:00 am, edited 2 times in total.
Keep calm and Boglehead on. KCBO.

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ClevrChico
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Re: Vanguard Managed Payout Fund

Post by ClevrChico » Sat Jun 16, 2018 7:51 am

The "auto-pilot" features of this fund are nice. It's one less thing I have to worry about or discuss helping older family manage their money.

dbr
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Re: Vanguard Managed Payout Fund

Post by dbr » Sat Jun 16, 2018 9:48 am

ClevrChico wrote:
Sat Jun 16, 2018 7:51 am
The "auto-pilot" features of this fund are nice. It's one less thing I have to worry about or discuss helping older family manage their money.
Most brokers or mutual fund companies will arrange to make periodic fixed withdrawals from a holding. I don't think you have to buy a quirky fund to do that. https://investor.vanguard.com/contact-u ... nvestments

grok87
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Re: Vanguard Managed Payout Fund

Post by grok87 » Sat Jun 16, 2018 10:34 am

dbr wrote:
Sat Jun 16, 2018 9:48 am
ClevrChico wrote:
Sat Jun 16, 2018 7:51 am
The "auto-pilot" features of this fund are nice. It's one less thing I have to worry about or discuss helping older family manage their money.
Most brokers or mutual fund companies will arrange to make periodic fixed withdrawals from a holding. I don't think you have to buy a quirky fund to do that. https://investor.vanguard.com/contact-u ... nvestments
+1
Keep calm and Boglehead on. KCBO.

grok87
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Re: Vanguard Managed Payout Fund

Post by grok87 » Fri Jul 27, 2018 7:13 am

Based on the 6/30 holdings the vanguard managed payout fund is currently allocated 55/20/25 stocks/bonds/alternatives

Stocks
Us: 21.5%
Intl 33.5%

Bonds
Us bonds 14%
Intl bonds 6%

Alts
Vang alt strategies 12.5%
Commodities 7.5%
Mkt neutral 5%

Cheers
Grok
Keep calm and Boglehead on. KCBO.

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