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Managed payout funds are certainly better for retirees than annuities, but can you rely on them in retirement? Funds promising steady income for retirees are subject to the same market swings as other funds. If your expectation is that you’ll always receive the same income stream, you should carefully reread the fund’s prospectus. They aren’t guaranteed. Barron’s reports:
Converting a pot of money into retirement income isn’t an easy task for many retirees—and it’s a tricky proposition even for fund firms.
Take the Vanguard Managed Payout fund (ticker: VPGDX), one of the largest of a type of investment option aimed at helping retirees with the income conundrum. Vanguard cut its payout to investors this year by 8% after the portfolio took a hit in last year’s selloff.
The $1.8 billion fund is structured to give investors regular monthly payouts that over time aim to keep pace with inflation. It targets an annual distribution rate of 4%—an effort to replicate a paycheck in retirement.
The actual payout is determined in January, based on the average performance of the portfolio over the prior three-year period. The payout for this year was based on performance over 2016, 2017 and 2018, which meant it included the fund’s 5.7% loss last year. That translated into an 8% lower payout this year than last, marking the biggest decline since Vanguard retooled the fund in 2014.
The fund discloses that payouts can vary. But Morningstar analyst Jeff Holt says expectations are everything—and that those accustomed to steady paychecks regardless of market gyrations could be disappointed when their payout is 8% lighter.
Read more here.
Jeremy Jones, CFA
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