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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Much Fishing to Do on March 16, 2019, 02:26:17 PM

Title: Vanguard Managed Payout Fund as simplest practical advice for Others
Post by: Much Fishing to Do on March 16, 2019, 02:26:17 PM
So I like many on this site believe in a diversified, fairly stock heavy portfolio and a 4% withdraw rate.

My father has been asking me about his investments, and I;ve been trying to figure out how to give advice on how to basically follow what I believe is proper investing/withdrawal without giving someone an overwhelming amount of work to do if they are not as heavily into investing as most on this site are.  Another way I think of this is what instructions would I suggest to my wife (who could care less about the investing part of things) on handling our investments if I passed away (we could FIRE now, and easily fatFIRE with the life insurance that would pay out if something did happen to me).

It seems like the easiest approach is to just suggest putting everything but an emergency fund into the Vanguard Managed PAyout FUnd.  This seems to have the ease of an annuity that I think attracts people (they give them money and in return get a monthly payment back) but of course is a balanced investment that should grow over time (and likely leave a large balance at passing if unaltered).  Seems to be a reasonable fee given the work they would do for balancing the portfolio, inflating the monthly payouts properly over time, etc, just like what I'm basically planning on doing the regular way.  IT has some complexity it seems in its composition but seems to basically return about the same as the Lifestrategy Moderate growth fund (60/40) over time so I guess thats the closest ratio to tie it to.

Anyone see any downsides to this fund for this purpose?  Thanks
Title: Re: Vanguard Managed Payout Fund as simplest practical advice for Others
Post by: Indexer on March 17, 2019, 08:51:26 AM
I don't see the appeal.

You can buy the lifestrategy fund and set up an automatic withdrawal plan. That accomplishes the same thing with much lower fees. With the automatic withdrawal plan you can also set the monthly distribution to what you need instead of a 4% default. 

What about taxes?  Is the only account an IRA? That's the only case where an all in one fund makes sense. If taxable accounts are included then you need to look at tax implications including asset location. Balanced funds are not very tax efficient, and that is especially true for the managed payout fund.
Title: Re: Vanguard Managed Payout Fund as simplest practical advice for Others
Post by: AdrianC on March 17, 2019, 07:57:36 PM
We just moved my father in laws IRA from a financial advisor - they had him in 25 different mutual funds and three individual stocks - to Vanguard. Put it all in the life strategy 60/40 fund and set it up for automatic withdrawals. Simple, cheap, efficient.
Title: Re: Vanguard Managed Payout Fund as simplest practical advice for Others
Post by: Much Fishing to Do on March 19, 2019, 04:30:24 AM

You can buy the lifestrategy fund and set up an automatic withdrawal plan. That accomplishes the same thing with much lower fees. With the automatic withdrawal plan you can also set the monthly distribution to what you need instead of a 4% default. 


But telling someone to buy a lifestrategy fund and set up an automatic plan to withdraw "what they need" doesn't seem as safe as the managed payout fund.  The payout fund determines what you get, inflating as you go etc, in the same manners we all here generally use to determine what we can draw that will last us till our deaths. 

I agree it probably gets too complicated with mixed accounts to think you can do something this simple
Title: Re: Vanguard Managed Payout Fund as simplest practical advice for Others
Post by: TomTX on March 19, 2019, 06:35:43 AM

You can buy the lifestrategy fund and set up an automatic withdrawal plan. That accomplishes the same thing with much lower fees. With the automatic withdrawal plan you can also set the monthly distribution to what you need instead of a 4% default. 


But telling someone to buy a lifestrategy fund and set up an automatic plan to withdraw "what they need" doesn't seem as safe as the managed payout fund.  The payout fund determines what you get, inflating as you go etc, in the same manners we all here generally use to determine what we can draw that will last us till our deaths. 

I agree it probably gets too complicated with mixed accounts to think you can do something this simple

Why would you tell them to 'withdraw "what you need"'?

If you're close enough to their finances to give advice, you're close enough to tell them the dollar amount they should use for the automatic withdrawal, and how to inflation index it yearly.
Title: Re: Vanguard Managed Payout Fund as simplest practical advice for Others
Post by: Indexer on March 19, 2019, 03:45:19 PM

You can buy the lifestrategy fund and set up an automatic withdrawal plan. That accomplishes the same thing with much lower fees. With the automatic withdrawal plan you can also set the monthly distribution to what you need instead of a 4% default. 


But telling someone to buy a lifestrategy fund and set up an automatic plan to withdraw "what they need" doesn't seem as safe as the managed payout fund.  The payout fund determines what you get, inflating as you go etc, in the same manners we all here generally use to determine what we can draw that will last us till our deaths.

I agree it probably gets too complicated with mixed accounts to think you can do something this simple

Replying to the bold:  It doesn't adjust the payouts for inflation and it doesn't use the same 4% rule we talk about here.


4% rule:  Draw 4% in year one and add inflation each year. Example: 1 million dollar portfolio. Draw $40,000 in year 1, $40,800 in year two, $41,616 in year three, etc. Since the portfolio will fluctuate in value, sometimes growing more than 4% per year, and sometimes less(or even negative returns) there will be years you are drawing less than 4% and years you are drawing more than 4%. The idea is that your cash flows remain steady while you are drawing off a portfolio that is fluctuating. A lot of research found the ideal withdrawal rate to achieve this without running out of money over 30 years was 4%.

Managed payout fund:  Pays 4% of the current balance every year. If the portfolio rose perfectly with inflation each year that would be fine, but it doesn't do that. After a drop like 2008 your income would drop 28.79%! That's how much the fund was down in 2008. Using our example you would get $40,000 in year one, and $28,484 in year two. That's a pretty remarkable difference in income.

Now you can buy a Lifestrategy moderate growth fund and set up an automatic withdrawal plan for 4% in year one, and then just adjust it for inflation each January. This is very low maintenance, and lower cost.

Again, keep taxes in mind. You wouldn't want to put the Lifestrategy or the Managed Payout fund in a taxable account. Ideally, you would build a tax efficient portfolio, but that might not be as low maintenance as you want especially if there are existing holdings with capital gains you need to work around. If you wanted to keep it low maintenance and tax efficient the potential tax savings would probably make it worth it to just have Vanguard do it for you instead of using the Managed payout fund. 

Managed payout fund: 0.34%.   
Vanguard's portfolio management: 0.3%, and if they are using index funds the fund costs will likely be between 0.05 and 0.10%. All in should be in the 0.35 to 0.4% range.

I don't normally suggest using an advisor, but in this case the cost difference is negligible if you are already looking at the managed payout fund.