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By Dale Roberts
Special to the Financial Independence Hub
In September, Vanguard’s VRIF ETF was launched. The ETF is an all-in-one retirement funding solution. It is designed to pay out 4% of the portfolio value in 12 monthly distributions. That level of income is set at the end of each calendar year, based on the year end value. After the Santa Claus rally, it looks like VRIF holders will be getting a modest raise.
Here’s my original review of the Vanguard VRIF ETF. Simple and cost effective asset allocation portfolios can (historically) work very well to provide consistent and generous retirement income. The Vanguard VRIF option does it all for you, from portfolio management to paying out that income each month. Of course, you can also create your own ETF portfolio for retirement funding.
The key message is that simple works. And fees are important. I am a big fan of financial planning at the right cost, but keep in mind that investment fees and advisory fees will reduce the amount that your investments can deliver each year. You would subtract that percentage off the top. That’s why you might consider a fee-for-service advisor. In the end they might provide that retirement funding plan that would include an investment option such as VRIF.
The VRIF payout
The initial monthly distribution for VRIF was set at .083333 cents per unit.
As per the ETF mandate the distribution will stay the same throughout the year. The amount in your pocket includes fees and any withholding taxes within the ETF assets. It’s 4% in the clear. Of course, you would (most often but depending on your tax situation) create taxes payable from receiving the income in an RRSP, RRIF or taxable account. Within your TFSA the income would be tax free.
The performance of VRIF
In addition to paying out the monthly distributions, the ETF has also increased in price by 4.5% from inception.
If the trend continues VRIF will increase its payout in 2021. VRIF ETF holders might be getting a small raise. If we hold tight, it should be in the area of .087 cents per unit. As goes the stock and bond markets, so goes the VRIF distribution.
On the flipside if the markets had taken VRIF down, the distribution would have been decreased. That reduces the risks and provides the likelihood of more income stability over the decades. All said, that rolling income level (dependent upon markets year to year) might be seen as a slight drawback. If one has created their own ETF or stock portfolio they can decide to maintain or increase their income level, knowing that traditionally in most periods we can spend at a 4% area or more, inflation adjusted.
Of course that 4% retirement income rule is based upon a sensible balanced portfolio.
VBAL vs VRIF for retirement funding
While it is a short period of study, VBAL has a slight edge over VRIF from VRIF inception. Of course Vanguard’s VBAL has a greater stock allocation at 60% vs 50% for VRIF, so we would expect more generous returns when stocks are performing well. VBAL is besting VRIF by about .5% from mid September to December 18.
Again, it would my position that one can do better if they manage their own ETF and stock portfolio. But I certainly understand the appeal of the convenience of VRIF for many retirees. It is a great option.
This week I posted an update on our US stock holdings that bested the S&P 500 by a considerable amount. That mix certainly would have been able to create considerable retirement income in 2020 and over the last several years.
To manage risks, we hold those US stocks, Canadian dividend payers, Canadian bonds, US Treasuries, gold ‘stuff’, plus cash and bitcoin funds.
I’ll be back soon with a post on managing inflation risks in retirement. VRIF might not do the trick.
Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site on Dec. 20, 2020 and is republished on the Hub with his permission.
