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Tax-Deferred Retirement-Bucket Portfolios for Mutual Fund Investors

These portfolio mixes are geared toward retirees with different time horizons and risk tolerances/capacities.

Securities In This Article
Vanguard Shrt-Term Infl-Prot Sec Idx Adm
(VTAPX)
Vanguard Dividend Appreciation Index Adm
(VDADX)
Vanguard Wellesley® Income Admiral™
(VWIAX)
American Funds Intl Gr and Inc F1
(IGIFX)
Fidelity Floating Rate High Income
(FFRHX)

So much of investing during retirement comes down to the luck of the draw.

Prevailing interest rates could be high, enabling retirees to subsist exclusively on their stock and bond income. Or retirees could experience a period like 2005-20 when interest rates plummeted and even risky securities delivered miserly income payouts. Stock market values can also be unpredictable. People who embarked on retirement in 2010 enjoyed a nearly unbroken streak of gains from stocks for a decade, while those who hung it up in 2020 have had to put up with a lot more volatility, including substantial losses from stocks and bonds in 2022.

The Bucket approach to retirement portfolio allocation is designed to help retirees source their cash flows no matter what is going on with interest rates and stock and bond values. By maintaining an ongoing allocation to cash alongside a balanced portfolio, the retiree can withdraw funds from those liquid reserves when stock and/or bond values are in a trough. That allocation provides a psychological benefit, too, in that having cash on hand can help retirees cope with the volatility that will inevitably accompany their long-term holdings. In better market environments, retirees can source their cash flow needs from appreciated equity or bond holdings and not touch the cash.

About the Portfolios

These model portfolios are geared toward retired investors who are drawing upon their tax-sheltered accounts, like IRAs, 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 bond funds. Bucket 3 is the growth engine of each of the portfolios, geared toward years 11 and beyond of retirement. Owing to an anchor position in Vanguard Dividend Appreciation Index VDADX, which focuses on companies with a history of growing their dividends, the portfolio has a high-quality tilt that’s appropriate for a retirement portfolio.

The portfolios consist exclusively of funds with Morningstar Medalist Ratings of Gold, Silver, or Bronze, meaning our analysts think they’re likely to outperform their peers over a full market cycle. I’ll make changes to the holdings only if their fundamentals change or they are no longer highly rated.

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 preretirees 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 their 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 Mutual Fund Investors

Anticipated Time Horizon in Retirement: 25-plus years

Risk Tolerance/Capacity: High

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

Bucket 1: Years 1-2

  • 8%: Cash (certificates of deposit, money market accounts, and so on)

Bucket 2: Years 3-10

  • 8%: Fidelity Short-Term Bond FSHBX
  • 7%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
  • 10%: Fidelity Total Bond FTBFX
  • 7%: Vanguard Wellesley Income VWIAX

Bucket 3: Years 11 and Beyond

  • 25%: Vanguard Dividend Appreciation Index VDADX
  • 15%: Vanguard Total Stock Market Index VTSAX
  • 20%: American Funds International Growth and Income IGIFX

Moderate Tax-Deferred Retirement-Bucket Portfolio for Mutual Fund Investors

Anticipated Time Horizon in Retirement: 15-25 years

Risk Tolerance/Capacity: Moderate

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

Bucket 1: Years 1-2

  • 10%: Cash

Bucket 2: Years 3-10

  • 10%: Fidelity Short-Term Bond
  • 10%: Vanguard Short-Term Inflation-Protected Securities Index
  • 12%: Fidelity Total Bond
  • 5%: Vanguard Wellesley Income
  • 3%: Fidelity Floating Rate High Income FFRHX

Bucket 3: Years 11 and Beyond

  • 25%: Vanguard Dividend Appreciation Index
  • 10%: Vanguard Total Stock Market Index
  • 15%: American Funds International Growth and Income

Conservative Tax-Deferred Retirement-Bucket Portfolio for Mutual Fund Investors

Anticipated Time Horizon in Retirement: Fewer than 15 years

Risk Tolerance/Capacity: Low

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

Bucket 1: Years 1-2

  • 12%: Cash (certificates of deposit, money market accounts, and so on)

Bucket 2: Years 3-10

  • 10%: Fidelity Short-Term Bond
  • 10%: Vanguard Short-Term Inflation-Protected Securities Index
  • 15%: Fidelity Total Bond
  • 5%: Vanguard Wellesley Income
  • 5%: Fidelity Floating Rate High Income
  • 3%: Loomis Sayles Bond LSBDX

Bucket 3: Years 11 and Beyond

  • 20%: Vanguard Dividend Appreciation Index
  • 8%: Vanguard Total Stock Market Index
  • 12%: American Funds International Growth and Income

A version of this article was published on March 1, 2023.

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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