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Vanguard Managed Payout Fund – Retirement Income

The Vanguard Managed Payout Fund is an interesting fund for the early retiree because it provides you with a steady retirement income from your investment portfolio without you having to do the math or perform any trades.

Of course, this doesn’t have to be for retirement only. You might want to cut back on your hours at work and supplement your income with such a payout fund.

Traditionally, if you had a stock and bond mutual fund portfolio, you might use some of the dividends and sell some appreciated funds in order to create the income you need in. But with a payout fund such as the Vanguard Managed Payout Fund – VPGDX you would get regular monthly income deposits into an account of your choice based on how much you have invested in this fund.


Predictable Income

Most people prefer a predictable and steady income which is why they are willing to forego the tax savings of independent contractor work for a j-o-b.

If you have a oodles of money and a low overhead then you can park it in a CD or a bond fund and enjoy a steady income. Few of us will be in this unfortunately position which is why Vanguard created this payout fund. 

Rental Income

Rental income properties are desirable exactly because they offer a steady monthly income. But real estate isn’t exactly headache-free. 

My Portland condo could fetch me $1,200/month in rent every month if I decided to rent it out. I could also raise rents every few years to keep up with inflation if needed.


Annuities are another desirable income source for retirees or those desiring a regular monthly/annual income.

With an annuity you forfeit a certain sum of money to an annuity company who then pays you out a regular monthly/annual income until you die.

For example, I would give up $500,000 to such a company and in return get $1,900/month every month until I die.

Bond Portfolio

A bond portfolio could be a gang of bond mutual funds which will offer you a steady monthly income. We’re not talking about junk bonds but highly rated bonds which will have lower risk and thus lower returns (yields). 

One of my bond portfolios holds $30,000 in VMLTX and I earn about $45/month from this every month. I would need to have quite a lot invested – nearly $1M – in order to have a monthly income of $1,500. It’s simply too inefficient for me. 

Stocks (securities)

If you invest $500,000 in a stock portfolio it would be fair to expect an annual dividend yield of 2% and you could probably have another 3% of stock value appreciation – 5% total annual returns. 

By the time you take care of fees and pay the taxes you could be left with around 4% of income a year – somewhere around $1,700/month from a $500k portfolio.

Unlike an annuitized sum of money, you would likely be left with some capital even after decades of taking some earnings.  

A stock portfolio isn’t quite as regular or predictable as you’d like it be. Even though you will still get dividend payouts even when markets are down, you will find it emotionally hard to sell stocks which have underperformed in order to achieve the steady income you desire.

This is exactly where the Vanguard Managed Payout Fund shines. There is a fund manager who will make sure that you are paid out that ~4% every year from your portfolio regardless of market conditions.



Vanguard Managed Payout Fund

This investment fund can be found on the Vanguard website under the symbol VPGDX and it has been around since 2008. It’s an actively management mutual fund. 


The main 3 purposes of this fund are:

  1. provide you regular monthly income
  2. have your monthly payouts keep up with inflation
  3. maintain the value of your initial investment

The primary purpose of this fund is to give you a regular monthly income, pure and simple. This is achieved by the fund managers (humans) adjusting the fund’s asset allocation in order to keep up with inflation.

The secondary purpose of this fund is to also preserve your investment capital. This means that the total amount you have invested – say, $500,000 – will likely still be present in your investment account even after you have gotten your steady monthly payouts for several decades.

Note, the purpose is not to grow the fund’s value or maximize returns – it’s to provide steady, predictable monthly income. This is clear when you look at the historical performance of the Vanguard Managed Payout Fund compared to an S&P500 fund.

VPGDX Fund Anatomy

VPGDX is an all-in-one fund or a balanced fund or a fund-of-funds – lots of different terms referring to the same thing. Essentially, you get to hold multiple different asset classes within a single mutual fund.

The screenshot above shows you the makeup of VPGDX. It’s made up of about 20% total US stock index fund, about the same percentage in a total international index fund, 14% in a total US bond fund, and 12% in an alternative strategy fund which is too complex to get into for this post.

Then there is another 34% that’s invested in emerging markets, commodities, and international bonds.

Fund Fees

Every mutual fund you purchase has fees associated with it, that’s how the mutual fund company makes money.

This fund has an expense ratio of 0.34%. So, every year this fund will charge you 0.34% of however much money you have invested with them. A portfolio capital of $500,000 would cost you $1,700/year or $141/month.

For comparison, I pay about that much every month to my financial adviser. I get a lot more value from my financial adviser than just a single mutual fund.

Fund Returns

We touched on this already, the fund seeks to return to the investor a steady income of around 4% a year. Looking at its historical returns, it has returned to the investor 3.72% a year after taxes and fees – pretty close.

A $500,000 portfolio would therefore net you $18,600/year or $1,550/month into perpetuity. And theoretically the value of this would be preserved so that after several years of inflation the payout from this fund would be higher.

Performance Comparison

Let’s compare VPGDX to VTSAX because younger long-term investors tend to hold a lot of assets within the entire US stock market, represented by VTSAX (Vanguard Total Stock Market Index Fund).

If you look at the comparison table above, VTSAX returns more every year compared to the Vanguard Managed Payout Fund. But of course there is going to be much more volatility with VTSAX which might make a steady, regular monthly income harder to design.


Passive Income

I can’t write this post about the Vanguard Management Payout Fund (VPGDX) without talking about passive income.

VPGDX is as fucking passive as it’s going to get. It’s like turning on the faucet on a slow and steady stream. It will be predictable and it will flow out regularly.

Of course, this income isn’t guaranteed but based on historical data it’s fairly certain that you will have this 4% steady return year after year without you ever having to look at your investment portfolio.


Designing Your Own Passive Income Portfolio

Vanguard recommends that you use VPGDX as a supplement to other income. They are basically saying that you should have a diversified income plan and not just rely on this fund alone for all of your income.

Critical Mass

If you have $15,000,000 in investable assets and your spending is around $100k a year then it’s impossible for you to run out of income barring global economic collapse. Shockingly, I have colleagues who think that they need close to this amount before they can retire – wtf. 

The point of all this passive income talk is that most of us don’t want to work our asses off to the point of reaching this critical mass in order to never worry about future income again.

I would rather achieve adequate passive income with far less invested. My net worth is hovering around $800,000 and my asset allocation is diversified enough to provide me with the income I need. There is even some wiggle room to handle market fluctuations.

Utilizing a Financial Adviser

I have a financial adviser because I believe I can reach my passive income goals much easier and with a lot less invested by utilizing Andrew Mohrmann. Other bloggers are recommending that you fire your financial adviser which might make sense when everyone’s portfolio is at an all-time high. 

My adviser can look at my entire financial profile holistically instead of focusing only on my securities portfolio as the Vanguard Management Payout Fund does.

In order to get a regular income stream you can have your FA would handle all the buying and selling of your funds. They would decide how much you should hold in each asset class and handle portfolio transactions.

It’s a very simple conversation: “Hey Andrew, I want to start getting some income from my portfolio and looking to have around $1,500/month. Is it feasible based on my current portfolio value? If so then please you use account xxxx3456 for the monthly deposits.”


Other Retirement Income Funds

Investopedia lists a few other funds which are similar to VPGDX for the purposes of having a headache-free steady income in retirement.

I won’t list them all here but the concept is the same. Each of these companies is trying to smooth out market volatility in order to generate a predictable income above what a CD or a bond fund would generate.


Neither Wealthfront nor Betterment had an intuitive link to generating a steady income for a retirement scenario.

I’m sure it’s a possibility since they have their own financial advisers on these platforms to help you plan and execute income for retirement, whether it’s for early retirement or a traditional retirement.

Single-Fund Investing

I wanted to highlight the distinction between this payout fund and a single-fund such as the Vanguard Target Date funds or other similar funds which change their asset allocation based on your age. 

Single-funds or all-in-one funds are great because you don’t have to worry about asset allocation adjustments. But they don’t create a payout for you. Not that it’s difficult to do but it’s just not what they are designed for. 

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