Investing Specialists

A Conservative Retirement Saver Portfolio

Christine Benz

Note: This article is part of Morningstar's 2018 Portfolio Tuneup week. A version of this article appeared on Jan. 27, 2017.

Seventy-five years ago, the average remaining life expectancy for a man reaching age 65 was 12.7 years, and 14.7 years for a 65-year-old woman, according to Social Security Administration data. Fast forward to today and those numbers have increased to 19.3 years and 21.6 years, respectively

Because the bond piece of the Conservative Saver Portfolio is larger than is the case with the Moderate Saver Portfolio, it's also more nuanced. While younger accumulators can get away with a single well-diversified bond fund--say, a core intermediate-term bond fund--people closing in on retirement will want to start diversifying their fixed-income exposure. Thus, the Conservative Saver includes Treasury Inflation-Protected Securities to help preserve purchasing power in the enlarging bond portfolio; I used the low-cost  Vanguard Inflation-Protected Securities (VAIPX)

Individuals at this life stage might also start setting up their portfolios by anticipated income needs, as demonstrated with the Bucket approach. With retirement five years into the future, it's too early to start raising cash for in-retirement living expenses; at today's very low yields, the opportunity cost of doing so is simply too great. But pre-retirees might consider steering part of their fixed-income sleeves to a short-term bond fund that could be readily converted into cash. After all, having sufficient short-term assets in the portfolio can help mitigate sequencing risk--the chance that a retiree could encounter a lousy market right out of the box. It's not too early to start lining up fairly liquid investments to meet income needs in the early years of retirement--in case income and rebalancing proceeds are insufficient to fund living expenses and the market is in the dumps. 

Morningstar's Lifetime Allocation Indexes also call for a small slice in foreign bonds for investors at this life stage. But in the interest of reducing the number of moving parts in the portfolio, I looked to our core fixed-income fund,  Metropolitan West Total Return Bond (MWTRX), to cover the waterfront. While the fund hasn't historically invested heavily in foreign bonds, I'd rather rely on diversified funds to deliver the noncore exposures than maintain a lot of tiny positions. I recently enlarged the TIPS position somewhat after removing the commodities ETF from the portfolio; this article explains the rationale for downplaying commodities.

10%:  Primecap Odyssey Growth (POGRX)
10%: Vanguard Dividend Appreciation (VDADX)
10%:  Oakmark Fund (OAKMX)
7%: Vanguard Extended Market Index (VEXAX)
10%: Vanguard Total International Stock Index (VTIAX)
4%:  T. Rowe Price International Discovery (PRIDX)
30%:  Metropolitan West Total Return Bond (MWTRX)
7%: Fidelity Short-Term Bond (FSHBX)
12%:  Vanguard Short-Term Inflation-Protected Securities (VTAPX)

How to Use
The key goal of all of my model portfolios is to depict sound asset-allocation and portfolio-management principles. Thus, individuals who are closing in on retirement can use the Conservative Saver Portfolio to help assess their portfolios' positioning. But it's worth noting that the portfolio won't be a good fit for all pre-retirees. For example, those who will be relying on pensions for much of their in-retirement living expenses, or those who know they can handle the volatility that comes along with a stock-heavy portfolio, will likely want to steer more than half of their portfolios to stocks.

As with the other portfolios, I'll aim to be quite hands-off when it comes to their maintenance. Instead, I'll make changes only when there's a substantive change in the fundamentals of one of the holdings--a significant manager or strategy change, for example. 

I also assumed "open architecture" when assembling the portfolios--that is, I assumed that an investor isn't wedded to a single brokerage or fund-company platform. In reality, that's rarely the case, so investors interested in crafting a portfolio along the lines of this one will want to aim for funds that give them similar exposures. (Here again, Morningstar analysts' Medalist funds can come in handy.) I've also created fund-family-specific portfolios for Vanguard, Fidelity, T. Rowe Price, and Schwab supermarket investors.

I also developed the portfolios without consideration for tax efficiency--that is, I assumed they would be held inside of a tax-sheltered wrapper of some kind, such as an IRA. Investors who intend to hold their portfolios inside of a taxable account would want to put a greater emphasis on tax efficiency, emphasizing index funds and ETFs on the equity side, for example. I developed my Tax-Efficient Retirement Saver portfolios for taxable accounts. 

Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.