January 30,2013
Vanguard and 1Wealth are offering retirees a quality alternative to the traditional managed fund.
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 your superannuation or 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 œthat nice young man down at Macquarie Bank and tell him to handle it. Big mistake. A stockbroker is not a fiduciary. And most big 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. There are better options. One 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). 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 œWell, I'm finally here. Now what do I do?
I recommend Vanguard not just because it is the 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.
If you don't have a huge lump sum to make the Vanguard managed payout fund work for you, but you still want a decent income then you may have no choice but to trade the market yourself. Can you do better than 7% trading your own portfolio? Definitely. But it takes time, attention and at least some foundation of knowledge. There are a number of websites, trading tools and educational resources that can help you to do this successfully. My recommendation would be to find a tool that does the heavy lifting for you.
A company called 1Wealth offer a program specifically aimed at novice traders. It is fully automated so it can be used by inexperienced investors as well as seasoned pros. There are many trading tools on the market but 1Wealth's package has around double the analysis of the closest competitor and subsequently has recorded the best returns over the last nine years. 1Wealth programs are designed to be simple to follow, however their results are far from ordinary outperforming traditional investment funds by a country mile.
If you wish to manage your own portfolio than 1Wealth is a great place to start, their entry level package doesn't come cheap, but given their consistent results it represents an excellent return on investment. For a top performing managed payout fund, Vanguard is a great choice, but if you require a complete source of income than 1Wealth is a smarter option. Average returns on 1Wealth's end of day package range from $65,000 to $85,000 per year depending on portfolio size.
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 “ the Vanguard fund or an automated system like 1Wealth's is a no-brainer, and a practical way to start converting that nest egg into monthly income.
Written by: Wayne Arnold
Distributed through News Limited Global News Wire Service
