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A Sample Moderate Retirement Portfolio in 3 Buckets

For investors with 20-year time horizons, this portfolio includes a good mix of shorter- and longer-term holdings.

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My previous "bucket" portfolios--one composed of traditional mutual funds, the other with exchange-traded funds--are probably a far cry from your grandparents' retirement portfolios. Rather than consisting entirely of bonds and certificates of deposit, they feature a roughly 50% stock/50% bond and cash split. Developed for a hypothetical retired couple with a 25- or even 30-year time horizon, the portfolios acknowledge that increasing longevity rates mean that most retirees will need a healthy equity stake for growth potential. And in a bow to today's low-yield environment, the portfolios rely on a total-return approach rather than maintaining an income-only strategy.

But not every retiree has a 25-year time horizon and the high risk tolerance that would make such a portfolio a good fit. So this week I'll show how the bucket concept can be adjusted to suit a couple with a slightly shorter time horizon--20 years--and in turn a somewhat lower capacity to withstand the sometimes-extreme return fluctuations that accompany stocks.

Bucketing Basics
Bucket retirement portfolios are appealing on a couple of levels. By staging the portfolio by time horizon--which is the key point about bucketing--you can afford to ride out the volatility inherent in stocks and more aggressive bond types because you know you won't need to touch that money for several more years. My construct includes a safe, liquid bucket for near-term income needs; an intermediate-term bucket, mainly bonds, that will eventually cover expenses during the middle retirement years; and a long-term bucket consisting mainly of stocks for the later retirement years. Assets are periodically moved from buckets 2 and 3 into bucket 1 to help meet income needs.

A bucketed portfolio also differs markedly--and in my view, for the better--from one that anchors exclusively on income-producing securities. Income-producing stocks and bonds are well-represented in my bucket portfolios. But if the portfolio's income level falls short of the retiree's target for living expenses, he or she can look to rebalancing and tax-loss proceeds, capital gains distributions, and required minimum distributions to refill bucket 1. The advantage of the total-return approach is that it enables a retiree to build a better-diversified portfolio--that is, one that should have more attractive long-term risk/reward characteristics--than one anchored exclusively in high-income stocks and bonds.

As with the aggressively positioned portfolios, I used a hypothetical retirement situation to construct the moderate bucket portfolio. In particular, I assumed:

  • A married couple with a 20-year time horizon and a moderate risk tolerance
  • $1 million in total portfolio assets
  • A 5% initial withdrawal rate, meaning that they will withdraw $50,000 of their portfolio in year 1 of retirement, then inflation-adjust that amount in each year thereafter. (Assuming a 3% inflation rate, the year 2 withdrawal would be $51,500.) Income from Social Security and other sources would be on top of the $50,000 distribution.
  • The desire to spend all their money during their lifetimes (that is, no desire to leave a legacy)
  • They hold all of their assets within a tax-sheltered account, so the aftertax withdrawal amount would be lower than $50,000. Those with large shares of their portfolios within taxable accounts will need to pay greater attention to the tax efficiency of their holdings, especially with the fixed-income portion of the portfolio. Municipal-bond funds rather than taxable-bond funds might be appropriate.
  • The retirees will take a strategic approach to their portfolio management (that is, long-term and hands-off) rather than employ a more tactical strategy. They will regularly move assets from buckets 3 to 2 and 2 to 1, a process that will make the overall portfolio more conservative over time.

At first blush, that 5% withdrawal rate would seem to be overly aggressive, given that it's higher than the 4% generally deemed to be a safe withdrawal rate. But the research supporting the 4% rule employed a 30-year time horizon; recent research, such as that discussed by financial-planning expert Michael Kitces in this video, suggests that retirees with time horizons shorter than 30 years might safely nudge their withdrawal rates higher.

It's also worth noting that bucketing a retirement portfolio allows for a lot of flexibility. For example, although I've provided specific dollar amounts below, they can be readily adjusted to suit smaller or larger portfolios. (I've supplied percentages to enable you to do so.) Moreover, the portfolios don't require you to start from scratch by scrapping your existing holdings. For those with reasonably well-diversified portfolios consisting of sturdy core positions, those can be readily swapped in instead of the specific funds I've mentioned below.

Bucket 1: Years 1-2

  • $100,000 (10%): Cash: CDs, money market accounts, checking and savings accounts, and so on

The liquidity component of the portfolio is designed to meet the couple's income needs for years 1 and 2 of their retirement, so its goal is principal stability. Therefore, it includes true cash instruments. Investors who are comfortable with modest fluctuations in their principal values might consider augmenting one year's worth of cash (in this case, $50,000) with a slightly higher-yielding cash alternative such as  PIMCO Enhanced Short Maturity (MINT). But with yield differentials between cash and noncash alternatives as low as they are right now, it's hard to justify the risk for a portion of the portfolio where stability is the main goal.

Bucket 2: Years 3-12

  • $75,000 (7.5%):  T. Rowe Price Short-Term Bond (PRWBX)
  • $75,000 (7.5%):  Fidelity Floating Rate High Income (FFRHX)
  • $150,000 (15%):  Harbor Bond (HABDX)
  • $75,000 ($7.5%):  Harbor Real Return (HARRX)
  • $125,000 (12.5%):  Vanguard Wellesley Income (VWIAX)

This component of the portfolio is geared toward providing income for living expenses once bucket 1 is depleted. The name of the game here is income production, stability, and inflation protection, as well as modest capital appreciation. This portion of the portfolio includes a high-quality short-term bond fund, to tap once bucket 1 is depleted; here I've used one of our analysts' favorites, Gold-rated T. Rowe Price Short-Term Bond. I've augmented that position with a small stake in a bank-loan (or floating-rate) fund, Fidelity Floating Rate High Income, which will tend to have limited interest-rate sensitivity and might also offer a measure of inflation protection. 

Harbor Bond, managed by Bill Gross and the team at PIMCO, is the portfolio's linchpin fixed-income position. Although all bonds could be vulnerable in a rising-rate environment, its flexibility to adjust its interest-rate sensitivity and venture into various bond-market sectors is attractive. Harbor Real Return, meanwhile, provides a measure of inflation protection, though it's also likely to be the most interest-rate-sensitive piece of the portfolio. Finally, the portfolio includes a dash of dividend-paying equity exposure via conservative-allocation vehicle Vanguard Wellesley Income, which combines a 60%-65% bond weighting with a 35%-40% value-oriented equity stake.

Bucket 3: Years 13-20

  • $100,000 (10%):  Vanguard Dividend Growth (VDIGX)
  • $100,000 (10%):  Vanguard Total Stock Market Index (VTSAX)
  • $100,000 (10%):  Harbor International (HAINX)
  • $50,000 (5%):  Harbor Commodity Real Return (HACMX)
  • $50,000 (5%):  Loomis Sayles Bond (LSBRX)


The growth engine of the portfolio, bucket 3, focuses largely on stocks. As with the aggressive portfolio, it uses Vanguard Dividend Growth as its anchor; although that fund's dividend yield isn't high in absolute terms, its focus on companies that have demonstrated a history of increasing their dividends gives it a high-quality, low-volatility emphasis. The portfolio also includes a broad stock market index tracker to supply the overall portfolio with exposure to the growth stocks and small- and mid-cap names on which Vanguard Dividend Growth tends to be light. Harbor International provides a high-quality take on overseas markets, focusing on companies with sustainable competitive advantages and strong balance sheets. Two niche holdings round out the portfolio: Loomis Sayles Bond supplies aggressive, value-oriented fixed-income exposure, while Harbor Commodity Real Return provides an additional measure of inflation protection.

See More Articles by Christine Benz

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.