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Tax-Deferred Retirement-Bucket Portfolios for Vanguard Investors

Designed for retirees in tax-deferred accounts, these portfolios blend index and active funds.

Morningstar
Securities In This Article
Vanguard Dividend Appreciation Index Adm
(VDADX)
Vanguard Shrt-Term Infl-Prot Sec Idx Adm
(VTAPX)
Vanguard Wellesley® Income Admiral™
(VWIAX)
Vanguard High-Yield Corporate Adm
(VWEAX)
Vanguard Short-Term Bond Index Adm
(VBIRX)

Creating in-retirement model portfolios consisting exclusively of Vanguard funds isn’t a heavy lift. Because the firm’s funds have ultralow costs and its lineup is widely diversified, the firm is a natural one-stop shop for many investors.

These model portfolios are designed for Vanguard investors who are actively drawing upon their portfolios for living expenses. They’re geared toward tax-deferred accounts like IRAs, which means that they’re not managed for tax efficiency on an ongoing basis.

About the Portfolios

These model portfolios are geared toward retired investors who are drawing upon their tax-deferred accounts to meet a portion of their living expenses. Bucket 1 of each portfolio is to provide money for cash needs for a year or two, so we’re not taking any risks with it; investors can use some combination of certificates of deposit, high-yield savings accounts, or money market mutual funds for this portion of the portfolio. Bucket 2 covers another eight years’ worth of cash flow needs. It’s designed to deliver slightly more income than Bucket 1, as well as a dash of inflation protection; thus, it consists mainly of high-quality short- and intermediate-term bonds. Bucket 3 is the growth engine of each of the portfolios, geared toward years 11 and beyond of retirement.

The portfolios consist exclusively of funds that rate as Morningstar Medalists, meaning our analysts think they’re likely to outperform their peers over a full market cycle. While Vanguard is best known for its index funds and exchange-traded funds, these portfolios feature a healthy dose of actively managed funds. However, index enthusiasts could easily mirror the portfolio’s asset-class exposures using all index funds or ETFs. I’ll make changes to the holdings only if their fundamentals change or they no longer rate as medalists.

How to Use Them

Note that the goal of these portfolios isn’t to generate the best returns of any retirement portfolio on record, but rather to help retirees and pre-retirees visualize what a long-term, strategic total-return portfolio would look like. Thus, a newly retired investor could follow the basic Bucket concept without completely upending existing favorite holdings.

Investors should take care to customize their portfolios to suit their own situations—risk tolerance and capacity, of course, but also planned spending. An investor’s own cash bucket, and in turn the allocations to the other two buckets, will depend on his or her portfolio spending rate. If an investor is using a lower starting withdrawal rate—say, 3% in the first years of retirement—Bucket 1 would accordingly be smaller (6% versus 8% in my Aggressive portfolio).

A bar chart of the stock, bond, and cash allocations for the Aggressive, Moderate, and Conservative tax-deferred retirement-bucket portfolios for ETF investors.

Aggressive Tax-Deferred Retirement-Bucket Portfolio for Vanguard Investors

Anticipated Time Horizon in Retirement: 25-plus years

Risk Tolerance/Capacity: High

Target Stock/Bond/Cash Mix: 60/32/8

Bucket 1

  • 8%: Cash

Bucket 2

  • 8%: Vanguard Short-Term Bond Index VBIRX
  • 7%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
  • 10%: Vanguard Total Bond Market Index VBTLX
  • 7%: Vanguard Wellesley Income VWIAX

Bucket 3

  • 25%: Vanguard Dividend Appreciation Index VDADX
  • 15%: Vanguard Total Stock Market Index VTSAX
  • 20%: Vanguard FTSE All-World ex-US Index VFWAX

Moderate Tax-Deferred Retirement-Bucket Portfolio for Vanguard Investors

Anticipated Time Horizon in Retirement: 15-25 years

Risk Tolerance/Capacity: Moderate

Target Stock/Bond/Cash Mix: 50/40/10

Bucket 1

  • 10%: Cash

Bucket 2

  • 10%: Vanguard Short-Term Bond Index VBIRX
  • 10%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
  • 12%: Vanguard Total Bond Market Index VBTLX
  • 8%: Vanguard Wellesley Income VWIAX

Bucket 3

  • 25%: Vanguard Dividend Appreciation Index VDADX
  • 10%: Vanguard Total Stock Market Index VTSAX
  • 15%: Vanguard FTSE All-World ex-US Index VFWAX

Conservative Tax-Deferred Retirement-Bucket Portfolio for Vanguard Investors

Anticipated Time Horizon in Retirement: Less than 15 years

Risk Tolerance/Capacity: Low

Target Stock/Bond/Cash Mix: 40/48/12

Bucket 1

  • 12%: Cash

Bucket 2

  • 10%: Vanguard Short-Term Bond Index VBIRX
  • 10%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
  • 15%: Vanguard Total Bond Market Index VBTLX
  • 8%: Vanguard Wellesley Income VWIAX
  • 5%: Vanguard High-Yield Corporate VWEAX

Bucket 3

  • 20%: Vanguard Dividend Appreciation Index VDADX
  • 8%: Vanguard Total Stock Market Index VTSAX
  • 12%: Vanguard FTSE All-World ex-US Index VFWAX

A version of this article published on Sept. 24, 2018.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

Director
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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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