A No-Brainer For Retirees Seeking Income
Every year, thousands of people retire with some kind of nest egg.
Most wish they had started sooner, saved more, handled the money better or left it alone longer so it ended up being larger. But in the end, it is what it is. The next step is to use it to generate income to supplement social security or, perhaps, a pension.
Yet studies show the majority of retirees have only a vague idea what to do with their lifelong savings – and many make one of two serious mistakes. The first is they turn it over to “that nice young man down at Merrill Lynch” and tell him to handle it.
Big mistake. A stockbroker is not a fiduciary. And most Wall Street firms are more interested in lining their own pockets than their clients’.
Another mistake is to plunk a huge chunk of it in an annuity. Not all annuities are bad, of course. But most are illiquid, opaque and way too expensive.
Helping Retirees Turn Savings into Income
A better alternative is managed payout funds. This is a new type of fund designed to help retirees turn their retirement savings into regular income. The goal is to provide a predictable stream of payments – like an annuity – but without the sales charges, surrender penalties and high annual costs.
Take the Vanguard Managed Payout Distribution Focus Fund (VPDFX), for example. This is an endowment-style fund that aims to pay 7% annually out of earnings and do it indefinitely, appealing for investors who don’t want to dip into principal.
There is no guarantee Vanguard will achieve this goal, of course. (Just as there are no guarantees any mutual fund will achieve its objective. Or any money manager, for that matter.) During lean years, the manager may have to dip into principal to make the target distribution. In fat years, it may accumulate capital to fund future distributions. That is exactly what it has done so far. Over the last three years, the fund has earned 9.2% a year and paid out the target 7% to shareholders.
There is no magic here. The fund pursues its objectives with asset allocation and rebalancing. This is just straightforward money management. Nothing tricky. But don’t kid yourself that most retirees know even the ABCs of investing. That’s what makes this a reasonably good choice for the new retiree who is scratching his head and saying “Well, I’m finally here. Now what I do?”
Providing the Best Service at the Lowest Cost
I recommend Vanguard not just because it is the nation’s largest mutual fund group with more than $1.7 trillion in assets under management. It also has a unique structure as a not-for-profit corporation. That means the funds themselves – and by extension the fund shareholders – own all of the common stock of the Vanguard Group. So there is never any incentive to do anything other than provide the best service at the lowest possible cost.
The company’s huge asset base allows it to enjoy enormous economies of scale. Vanguard’s costs are the lowest in the mutual fund industry. And not by a little. The average mutual fund charges fees six times higher than Vanguard’s.
Managed payout funds have only been around a few years. But VPDFX is the largest such fund in the industry – and the one with the lowest costs.
Can you do better buying, owning – and occasionally trading – dividend-paying stocks? Perhaps. But that takes time, attention and at least some foundation of knowledge.
If you’re like me, you have friends and relatives who wouldn’t know a stock from a bond and aren’t conversant with even the most basic investment terminology. For them – and many others – this fund is a no-brainer, and a practical way to start converting that nest egg into monthly income.