Six Things to Mull before Buying a Vanguard Managed Payout Fund
Vanguard's innovative endowments for the little guy are open for business.
Welcome to the decumulation era. The widely anticipated Vanguard Managed Payout Funds are available for purchase and should begin full operations next week.
These payout funds are among a new breed of mutual fund that aims to help investors draw down their nest eggs instead of build them up--or, in the fund industry parlance, "decumulate" assets instead of accumulate them. They are intriguing attempts to offer endowmentlike investment strategies to average investors, but judging from media and investor inquiries that I receive, I think they're still poorly understood. Here are some important facts to consider before committing a portion of your savings to these new vehicles.
Don't Say Annuity
The payout funds are designed to produce monthly income, but they aren't annuities. They don't have the same tax-advantaged elements. And they don't require that investors lock up their money. Investors can buy and sell shares just as they would with any other mutual fund. Also, there aren't many of the customizable features that annuities offer, such as guaranteed minimum withdrawals or payouts to spouses. Of course, those features can be confusing, and they cost money. So it's not surprising that payout funds are cheaper even than the total cost of Vanguard's own low-priced annuities. Most importantly, unlike an annuity, these funds make no guarantees. You could lose money in them.
Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.