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Managing flaws in managed payout funds

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Managed payout funds may cost more than you think. MarketWatch points out some of the shortcomings these funds have, not the least of which is that some use capital to fund payouts each month. The site points to several major firms as examples.

Vanguard’s funds’ main setback is that they use principal to meet payment obligations. Anywhere between 63 percent and 77 percent of payouts from Vanguard’s trio of funds come from the fund’s capital, according to MarketWatch. Managed payout funds from Schwab have another set of problems. They are designed not to touch principal, but don’t guarantee returns will be the same each month, and rates are much lower than with the Vanguard funds. Fidelity has 10 funds that offer an increasing percentage of distribution, although this doesn’t guarantee the dollar amount will increase along with it.