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A simpler managed payout solution for retirement income

October 16, 2013

Once you retire, you may face a common question: How to balance taking withdrawals from the savings you've worked hard to accumulate while maintaining enough savings—and the ability to access and control them—to see you through as long as you need.

Vanguard created the Vanguard Managed Payout Fund series in 2008 to help you meet these needs. To help make it simpler for you to use the investment to supplement your retirement income, we plan to merge the current three portfolios into a single fund, which will be named Vanguard Managed Payout Fund. The merger is expected to be completed early in January 2014.

"We remain committed to an all-in-one option for retirees and believe a single fund will simplify our managed payout offering and better serve clients' needs going forward," said Vanguard CEO Bill McNabb.

John AmeriksJohn Ameriks, who heads Vanguard's Active Equity Group, answered some questions about the upcoming changes.

What exactly is changing—and not changing—for Vanguard Managed Payout Funds?

We're merging two of the portfolios—Vanguard Managed Payout Distribution Focus Fund and Vanguard Managed Payout Growth Focus Fund—into Vanguard Managed Payout Growth and Distribution Fund. The resulting fund will have a new name: Vanguard Managed Payout Fund.

In addition, the merged fund will have a new annual distribution target rate of 4%, instead of three different distribution percentages. The concept of the "4% spending rule" has been around for a long time and research, including Vanguard's, has found 4% offers retirees a higher probability of maintaining a stable income stream that can be sustained over the typical retirement period of 20–30 years—even in a low-interest environment like the one we're in currently. It's an approach we advocate in our advice area, and it made sense to apply it to this portfolio as well.

While the fund will continue to make regular monthly payments, the 4% distribution rate will be different from all the current funds' rates. So if you were already invested in one of the funds, your monthly payment will be different than the amount you receive now and in some cases could be substantially different.

What's not changing is the philosophy and approach we take toward allocating the assets in the portfolio. The fund will continue to be actively managed, using a total return–based approach. It will also continue to allocate its assets across a broadly diversified selection of investments, including other Vanguard funds, stocks, REITs, bonds, cash, inflation-linked investments, and selected other exposures, such as commodities and market-neutral investments. The fund isn't expected to recognize any gains or losses as a result of the merger.

Why are you making these changes, and how will investors benefit?

We're always evaluating our funds' structures to ensure they make sense for investors. The funds' board of trustees, the executive committee, and a team of experts at Vanguard are highly engaged in this process. During these evaluations, it emerged that making these changes was the prudent course of action for several reasons.

First, the investment environment is quite different than the one during which the funds were launched. Shortly after the funds' introduction, the global stock markets suffered one of the worst declines in financial history, followed by a considerable decline in interest rates over the last five years. The result has been a prolonged period of extremely low bond yields. Because the world around the funds changed, we've adjusted to it. This type of evaluation is something we do regularly.

Next, we saw the opportunity to make it simpler for investors to use the managed payout solution as a supplement to their total retirement income and savings preservation plan. Now they'll have one option that uses a 4% payout.

What type of role do you think this fund might play in an investor's portfolio?

A managed payout fund can serve a valuable role in helping investors supplement their retirement income. It's expected to pay out a regular monthly amount to enable you to spend from your portfolio in a disciplined way, while also keeping your savings invested so that they have the opportunity to continue growing. Of course, the fund will likely be just one part of your overall retirement savings and investing strategy.

There's something else I think it's important for investors to understand: The fund is an investment product, not a contract, such as an annuity. This investment has all the risks—and potential benefits—any investment has. There's a possibility your investment balance may go down. Part of your payout could be from your original investment; that's called "return of capital." But the fact that it's a fund and not a contract gives you flexibility. In particular, if your plan or circumstances change, you can access your savings any time you need to do so.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • All asset figures are as of September 30, 2013, unless otherwise noted.
  • The Managed Payout Funds are not guaranteed to achieve their investment objectives, are subject to loss, and some of their distributions may be treated in part as a return of capital. The dollar amount of a fund's monthly cash distributions could go up or down substantially from one year to the next and over time. It is also possible for a fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy. An investment in a fund could lose money over short, intermediate, or even long periods of time because each fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The funds are proportionately subject to the risks associated with their underlying funds, which may invest in stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market neutral investments, and leveraged absolute return investments.
  • For more information on Vanguard funds, visit Funds, Stocks & ETFs or call 800-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. Copies of the final prospectus can be obtained from Vanguard. Please note that a preliminary prospectus is subject to change.
  • U.S. Pat. No. 8,180,695 and 8,185,464.
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