Skip to Content
Investing Specialists

An Aggressive ETF Bucket Portfolio for Retirement

This ETF-oriented portfolio is ideal for retirees with long time horizons.

Editor's note: This portfolio was reviewed on Jan. 8, 2021.

The past few decades have brought huge challenges for retirees and pre-retirees: three market crashes, the ebbing away of pension plans, and dramatically declining interest rates.

The Bucket approach to retirement planning doesn't solve all of those problems. But as a total-return strategy, it helps retirees build diversified portfolios that aren't overly dependent on whatever the interest-rate gods are serving up at any given point in time. In lieu of focusing strictly on income-rich securities, retirees using the Bucket approach set aside a baseline of cash for near-term living expenses. Before that bucket runs dry, they can refill it with dividend and income distributions and/or rebalancing proceeds.

The last long-running financial crisis in 2008 provides a useful illustration of how the Bucket strategy can help retirees deal with challenging conditions. Because Bucket 1 holds enough cash to cover one to two years' worth of living expenses, the retiree wouldn't have to sell stocks or risky bond types, all of which suffered big losses in 2008, at a low ebb. The cash cushion would also allow income-focused investors to regroup as bond yields dropped dramatically lower and many financial-service firms slashed their dividends.

My Model Bucket Portfolios are designed to help pre-retirees and retirees customize their portfolios' allocations based on their anticipated spending needs. Because my model portfolios are long-term-oriented, my goal is to make infrequent changes dictated by fund fundamentals.

Bucket Basics
My aggressive ETF Bucket Portfolio uses the same general framework and assumptions as the aggressive mutual fund portfolio. It assumes a retired investor with a 25-year time horizon (or longer) and a fairly high risk capacity. (Investors can, however, customize their portfolio amounts to suit their own portfolios' value.)

As with the mutual fund portfolios, I've employed three buckets here: Bucket 1, for near-term living expenses; Bucket 2, holding securities with an intermediate-term time horizon in mind, primarily bonds; and Bucket 3, holding the portfolio's longest-term growth assets.

Bucket 1: Years 1-2
8%: Cash (certificates of deposit, money market accounts and funds, and so on)

As the liquidity sleeve of the portfolio, the focus of Bucket 1 is stability with a modest dose of income. Right now, online savings accounts are likely the best source of guaranteed yield available.

Rather than running with my 8% allocation to cash, retirees interested in the Bucket strategy should be sure to right-size their cash positions based on anticipated spending from their portfolios. A retiree spending just 3% per year of her portfolio, for example, might maintain just a 6% stake in cash (her 3% withdrawal times two years' worth of living expenses).

Bucket 2: Years 3-10
7%:  Vanguard Short-Term Bond ETF (BSV)
10%:  Vanguard Short-Term Inflation-Protected Securities (VTIP)
13%:  iShares Core Total U.S. Bond Market (IUSB)
5%:  Vanguard Dividend Appreciation Index ETF (VIG)

This portfolio gradually steps out on the risk spectrum, starting with high-quality short-term holdings to serve as next-line reserves should Bucket 1 become depleted and income and rebalancing proceeds are insufficient to refill it. It also holds Vanguard's short-term TIPS fund to provide a bit of inflation protection. Its core holding is iShares Core Total U.S. Bond Market. The iShares ETF has exposure to the entire credit spectrum, including lower-quality bonds, but its total low-quality exposure is currently less than 10% of assets. At the tail end of Bucket 2 is a position in Vanguard Dividend Appreciation, which is also the main equity holding in Bucket 3.

Bucket 3: Years 11 and Beyond
23%:  Vanguard Dividend Appreciation Index ETF (VIG)
13%:  Vanguard Total Stock Market Index ETF (VTI)
15%:  Vanguard FTSE All-World ex-US ETF (VEU)
3%:  Vanguard High-Yield Corporate (VWEHX)
3%: iShares JPM Morgan USD Emerging Markets Bond (EMB)

Bucket 3 is the growth engine of the portfolio and also has the longest anticipated holding period. Therefore, it features heavy equity exposure as well as smaller stakes in volatile, credit-sensitive bond types.

Vanguard Dividend Appreciation is the portfolio's largest position. Although its dividend is higher than the broad market's, it's not too much higher and certainly isn't high in absolute terms. But the key attraction here is a focus on quality: The fund focuses on highly profitable firms with histories of raising dividends. That makes it an appropriate anchor holding for investors at any life stage, and its below-average volatility makes it especially appealing for retirees. The portfolio also includes U.S. and foreign-markets index exposure, to bring its costs down and fold in sectors that aren't well-represented in Vanguard Dividend Appreciation, such as financials and technology.

Whereas the mutual fund portfolios include a stake in  Loomis Sayles Bond (LSBDX) in Bucket 3, the ETF portfolios take a piecemeal approach to riskier bond market sectors, taking small positions in a junk-bond and emerging-markets bond fund. Note that I've used an actively managed fund, Vanguard High-Yield Corporate, rather than an ETF for this market segment. That's because Morningstar's passive strategies researchers prefer active funds in this space because they can maintain control over liquidity issues and trading costs. The Vanguard fund also cheaper and higher-quality than its passively managed counterparts.


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