Vanguard's Managed Payout Mutual Funds - A Primer

[This post is written and copyrighted by FIRE Finance (]

Recently when we wrote about "Three Good Habits of Successful Retirees," we saw that it was important for retirees to grow their investments. To keep one's real purchasing power intact over time it is necessary to beat inflation by earning a return rate above it. And this holds true for a retiree's portfolio as well.

VanguardNow Vanguard has gone ahead and made the job easy for investors nearing or in retirement by introducing Vanguard Managed Payout Funds (VMPF). Vanguard (founded by John Bogle) is a well respected company which has been helping investors accumulate wealth for retirement for the past thirty years. They are reputed for having low annual expense ratios for most of their investing instruments like mutual funds, ETFs, stock index funds and more.

We have constructed a primer to understand a VMPF and its details. Here we go.

What is a VMPF?
A VMPF is an innovative low-cost mutual fund offering which is designed to function like an endowment. Its goal is to invest over the long term to preserve or build capital, while generating monthly payments.

Who should invest?
Investors with a long-term investment horizon of at least five years should think about VMPFs. Its preferable to invest in a VMPF through a tax-deferred account like an IRA. These funds will be particularly attractive to participants in employer-sponsored retirement plans who are seeking to roll over retirement assets into a diversified portfolio.

Minimum initial investment requirement? $25,000.

Subscription period? April 21st to May 4th, 2008.

Types of VMPFs?
At present Vanguard is offering three types of VMPF. They offer distinct, dual objectives for investors with varying retirement income needs and principal growth goals:

Vanguard Managed Payout Growth Focus Fund (VPGFX)
- This fund has been designed for investors seeking only a modest current payout from their assets but wishing to see their capital and payouts increase over time.

Vanguard Managed Payout Growth and Distribution Fund
(VPGDX) - It is designed for investors seeking to balance a need for a current payout from their assets with the desire to maintain the purchasing power of their payouts and capital over the long term.

Vanguard Managed Payout Distribution Focus Fund
(VPDFX) - If you are seeking to limit exposure to general stock market risk then this is your instrument. It has been specifically designed for investors seeking a greater payout level to satisfy current spending needs.

What will be my monthly payout?
Vanguard has designed a payout calculator to help us determine an estimated investment amount needed to generate a specific monthly payout amount or an estimated monthly payout based on a specific investment amount. Play with it to figure out your monthly payout.

Advantages of a VMPF?
1. Unlike traditional annuities, with VMPF there are no fees or penalties for account principal withdrawals. Investors have easy access to their assets at any time.

2. VMPFs also give investors greater control of their assets for estate planning purposes.

3. They have no sales commissions.

4. As of December 31, 2007, the annual expense ratios of VMPFs are expected to range between 0.57% -0.58%. According to Lipper Inc, this expense ratio is less than one-half the average expense ratio of all mutual funds.

What investing instruments comprise a VMPF?
VMPFs are structured as "funds of funds." They may invest primarily in:
  • Low-cost Vanguard domestic and international stock index funds
  • Bond and REIT index funds
  • Inflation-protected securities
  • Money market instruments.
Vanguard may also allocate a portion of a VMPF's assets to commodity-linked and market-neutral investments that are expected to add diversification. This might result in a more consistent return pattern than a traditional balanced portfolio of stocks, bonds, and cash.

To reduce initial transaction costs, during the subscription period, the VMPFs will invest in money market instruments to accumulate sufficient assets to construct representative, diversified portfolios. After the subscription period is over, the VMPFs are expected to implement their long-term investment strategies.

What are the associated risks?
Investors should note that the funds are not guaranteed to achieve their investment objectives, are subject to loss, and their distributions may be treated in part as a return of capital.

Vanguard funds classified as moderate are subject to a moderate degree of fluctuations in share prices. This price volatility may be due to one of several factors:
  1. a fund may hold longer-term bonds, which are subject to wide swings in value as interest rates rise and fall
  2. a fund may hold income-oriented common stocks
  3. a fund may hold a balance of both stocks and bonds
In general, such funds are appropriate for long-term (at least 5 years) investors who are able to tolerate moderate-to-high short-term fluctuations in price, and wish to achieve some combination of current income and modest growth potential.

Which type of VMPF should I choose?
Vanguard has provided a tool (a set of simple questions) in "Choose which fund is best for you" to help us decide which fund is most appropriate for our needs and risk tolerance. Check it out to see what fits your need.


It is important for retirees to have a dependable source of income and have access to their assets to meet unforeseen expenses due to emergencies like health issues. Also, the nest egg needs to grow to preserve its purchasing power and provide a return rate above the current inflation rate.

A VMPF is a low cost diversified investment option which has been designed to address the above issues for retirees. We trust Vanguard and believe that they will do a good job with VMPFs. Let us wait and watch its performance. Thanks to Vanguard for creating this innovative investing vehicle.

Image Source(s): iStockPhoto

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