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My latest MoneySense Retired Money column looks at Vanguard Canada’s new targeted 4% annual payout vehicle for retirees and near-retirees, provided by its new VRIF ETF. You can find the full article by clicking on the highlighted headline: The lowdown on Vanguard’s Retirement Income ETF: can you rely on its 4% payout target?
The Vanguard Retirement Income ETF Portfolio [VRIF/TSX] started trading Sept. 16th and offers retirees and near-retirees a 4% targeted — as opposed to guaranteed — payout. See also the Hub’s republication of Robb Engen’s preview on VRIF that appeared first on his BoomerandEcho site.
Positioned as a “Decumulation” product for retirees and near-retirees, it’s probably no coincidence that the 4% target is nicely in line with the long-established 4% Rule discussed on the Hub and MoneySense earlier this summer.
While a targeted return is NOT a guarantee – unlike the guaranteed but puny rates paid by GICs these days – Vanguard expects it will attract a fair amount of money from income-oriented investors suffering sticker shock when their GICs mature. Currently, many 1-year GICs pay around 0.5%, ranging from as little as 0.3% to no more than 1.1%. Even going out to 5-year terms, they’re typically paying only 1.4%, ranging from under 1% to 2% in the best case.
Technically, those GIC returns are “guaranteed” but a cynic might say they’re guaranteed to lose money on an after-tax, inflation-adjusted “real return” basis. Based on recent statements by the Bank of Canada and US federal reserve, this is not likely to improve before 2023. In the UK there are even renewed whispers of negative rates.
Of course, to achieve the 4% targeted payout, investors still have to bear some stock-market risk. VRIF consists of eight existing Vanguard stock and bond ETFs with an asset mix of roughly 50% stocks and 50% bonds.
VRIF has much lower fees than comparable income mutual funds and income ETFs
Monthly income mutual funds and ETFs have been around for years but as is typical, Vanguard aims to be the low-cost leader in the category. With such tiny returns from the fixed-income component, those costs are an important determinant of how much money is left for investors. The full MoneySense article recaps the fees relative to existing income mutual funds and income ETFs. Continue Reading…
