A Moderate Retirement Portfolio in 3 Buckets
This portfolio is geared toward retirees with a 20-year time horizon and moderate risk tolerance.
The going has gotten tough for retiree finances during the past decade and a half, with extreme stock market volatility, low bond yields, and pensions under fire. Whereas the previous generation of retirees may have been able to easily generate a livable income with a combination of bond and dividend payments, doing so today is a heavier lift. The S&P 500 currently yields about 2%, and high-quality intermediate-term bonds pay less than that. That means income-minded retirees need to either have a lot of wealth, such that today's low income payout on a 60% stock/40% bond portfolio is enough to live on, or venture into higher-risk parts of the stock and bond markets to amp up their income streams.
That challenging environment probably explains why the Bucket concept for retirement-portfolio planning has gained so much traction during the past several years. Pioneered by financial-planning guru Harold Evensky, the Bucket approach is simply a total-return portfolio combined with a cash component to meet near-term living expenses. The long-term portion of the portfolio includes income-producing securities, but its main goal is to maximize long-term total return. Proceeds from the long-term portfolio--whether from income, rebalancing, or both--are periodically plowed into Bucket 1 to meet living expenses.
Everything in Moderation
Whereas the Aggressive Bucket Portfolio is geared toward retirees with a 25-year (or longer) time horizon and an ability to withstand the volatility that comes along with a 50% equity weighting, the moderate portfolio assumes a 20-year time horizon and less of an appetite for short-term volatility. It holds a roughly 40% equity stake, with the remainder of the portfolio in bonds and cash.
Even though this portfolio's stock weighting is lower than the aggressive portfolio's, it's not risk-free. A sustained equity-market sell-off would take a toll. And with a heavy allocation to bonds, it could suffer losses in a period of rising interest rates.
That said, I'd point out that the main goal of this and all of the Bucket portfolios is to help the retiree generate adequate cash flow using a diversified total-return portfolio while also preserving principal; capital appreciation above and beyond what's needed for the retiree's living expenses during his lifetime is secondary. Retirees for whom increasing principal is a key aim may well want to run with a higher equity weighting, and the various Buckets in these portfolios can be adjusted higher or lower to suit a retiree's own goals and risk preferences. Additionally, even though the portfolios include funds that have Morningstar Analyst Ratings of Bronze or better, investors should feel free to employ their own favorite like-minded holdings in lieu of the ones featured here.
I've included three Buckets for the Moderate portfolio--geared toward the near, intermediate, and long term.
Bucket 1: Years 1-2
The goal of this portion of the portfolio is to lock down money needed for near-term living expenses; income production is secondary. Therefore, it holds true cash instruments rather than venturing into investments such as ultrashort funds, which may at times deliver higher yields but do so at the expense of principal volatility. Rather than arbitrarily holding 10% cash, investors should look to their own portfolio withdrawals to determine how large their cash positions should be. Holding two years' worth of cash-flow needs in cash is a reasonable benchmark. For example, a retiree who's spending 3% of her portfolio per year would hold just 6% in cash reserves.
Bucket 2: Years 3-10
Bucket 2 is designed to deliver a higher level of income than Bucket 1; it also aims to preserve purchasing power with a dash of capital appreciation. The risk level in this portfolio stair-steps gradually upward. The Fidelity Short-Term Bond fund would serve as next-line reserves in case bucket one were to become depleted and rebalancing proceeds and/or portfolio income were insufficient to meet living expenses. Harbor Bond, a near-clone of PIMCO Total Return (PTTRX), remains the portfolio's largest bond holding.
Because this portion of the portfolio has a longer time horizon, inflation protection is a concern. Vanguard Short-Term Inflation-Protected Securities delivers inflation protection without a lot of interest-rate-related volatility. Investors could also use individual I Bonds in this slot, too.
A position in Vanguard Wellesley Income, which features a roughly 60% bond/40% stock allocation, provides both income and a shot of capital appreciation. I've also included a slice of a floating-rate, or bank-loan, fund. This Fidelity fund should hold its ground and even gain in a period of rising interest rates, though it's also sensitive to the credit cycle. (It got socked during the market swoon in the first quarter of 2020, for example.)
Bucket 3: Years 11 and Beyond
The long-term portion of the portfolio, geared toward growth, generally mirrors Bucket 3 of the aggressive portfolio. It includes a high-quality equity emphasis with its position in Vanguard Dividend Appreciation, but it also features broad-ranging sector exposure owing to the total market U.S. index fund.
For foreign-stock exposure, I've included a position in American Funds International Growth and Income. The latter fund maintains a sensible focus on dividend payers overseas, employs a multimanager setup that should help ease manager transitions, and charges a reasonable expense ratio. The F-1 share class is available on a no-load, no-transaction-fee basis via brokerage platforms like Schwab's.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.