Our Best Investment Portfolio Examples for Savers and Retirees

Morningstar’s Christine Benz put together a series of investment portfolio examples that both retirees and savers can refer to as they build their own portfolios.

The goal of these portfolios isn’t to generate the best returns of any retirement portfolio on record. They’re intended to help retirees and preretirees visualize what a long-term, strategic total return investment portfolio could look like. So, an investor could look to these portfolios for guidance on asset allocation without completely upending their favorite holdings.

From mutual fund portfolios to exchange-traded fund portfolios, from tax-efficient portfolios to simple portfolios for the minimalist investor, this series of portfolios has something for everyone. More than anything, these portfolios serve as examples of how investors can construct portfolios that match their own financial goals.

How To Build a Retirement Portfolio Using the Bucket Approach

The Bucket approach to investment portfolio construction is anchored on the basic premise that assets retirees need to pay for living expenses now ought to remain in cash despite its low yields. Assets that won’t be needed for several years can be parked in a diversified pool of long-term holdings, with the cash buffer providing the peace of mind to ride out periodic downturns in the long-term portfolio.

Most of the model portfolios laid out in the sections below include three Buckets geared toward the near, intermediate, and long term. Investors should use their own portfolio spending, financial goals, risk tolerance, and risk capacity to determine how much they hold in each bucket.

The Bucket structure calls for adding assets back to Bucket 1 as the cash is spent down. Yet investors can exercise a lot of leeway to determine the logistics of that necessary Bucket portfolio management.

Investment Portfolio Examples for Retirees

Benz’s Bucket portfolios for retirees include a built-in stabilizer for turbulent times—cash reserves that retirees can draw upon when yields are insufficient to meet living expenses and it’s not a good time to disturb stocks. The goal of having buffers like these is, in no small part, peace of mind. A retiree shouldn’t be overly rattled during periods of short-term market turbulence because near-term spending will be relatively undisturbed, and the rest of the investment portfolio can recover when the market eventually does.

To construct a retirement Bucket portfolio, the retiree starts with anticipated income needs for a given year, then subtracts certain sources of income like Social Security and a pension. What’s left over is the amount of cash flow that the portfolio will need to supply each year (in other words, the desired withdrawal amount, including income, capital gains, and outright withdrawals).

The buckets are organized as follows:

• Bucket 1: Six months’ to two years’ worth of living expenses—not covered by Social Security—are housed in cash instruments.
• Bucket 2: Another 8-10 years’ worth of living expenses are housed in bonds.
• Bucket 3: The remainder of the portfolio is invested in stocks and a high-risk bond fund.

Income and rebalancing proceeds from Buckets 2 and 3 are used to replenish Bucket 1 as it becomes depleted.

These investment portfolio examples include aggressive, moderate, and conservative portfolio options to align with a retiree’s level of risk tolerance. The portfolios are designed to be held in either tax-sheltered or taxable accounts. A retiree can build the right portfolio for their needs by customizing their allocations based on their own expected portfolio withdrawals.

Tax-Sheltered Model Portfolios for Retirees

Retirees should aim to take full advantage of tax-sheltered accounts, like individual retirement accounts and employer-sponsored 401(k)s, to reduce the drag of taxes they’re on the hook to pay during retirement.

Investors are free to invest in all the highly taxed investments they like in these accounts, because they’ll pay taxes only when it comes time to withdraw money. Rather than owing taxes on dividends and capital gains, traditional IRA and 401(k) investors owe ordinary income taxes only on the amounts they pull out. (And Roth investors won’t owe any taxes at all on qualified distributions.)

This series of sample portfolios for retirees is designed to be held in tax-sheltered accounts, so investors can take advantage of investments with high tax-cost ratios in their investment selection.

Taxable Model Portfolios for Retirees

One of the easiest things an investor can do to improve their portfolio’s take-home return is to pay attention to tax efficiency. An obvious strategy to limit taxable capital gains and income distributions is to stash investments inside tax-sheltered accounts. But once they are full, investors have no choice but to save inside of taxable accounts. And building assets in taxable accounts can be a good idea, especially in retirement.

Keeping an investment portfolio tax-efficient tends to be a particularly big issue for retirees. That’s because bonds typically grow in importance in investors’ portfolios as retirement draws near, and income from taxable bonds is taxed at ordinary income tax rates versus the lower rates that apply to capital gains and dividends. Moreover, long-run bond returns are apt to be lower in absolute terms than long-term stock returns, meaning that taxes can gobble up a bigger percentage of their payouts.

These portfolios are designed for retirement assets held outside confines of IRAs and 401(k)s: in taxable, nonretirement accounts where investors pay taxes on every dividend and capital gains distribution their holdings kick off.

Investment Portfolio Examples for Savers

The Bucket Approach is most useful for retirement planning. A bucketed portfolio will tend to be less useful for savers, who are relying on their salaries rather than their investment portfolios to meet their day-to-day cash needs. That said, time-horizon considerations should be a key aspect of portfolio planning for savers, too.

In addition to tilting their investment portfolios heavily toward stocks, people with many years until retirement can also reasonably hold more in potentially more volatile asset class subsets, such as small-cap stocks and foreign stocks and bonds, than people with shorter time horizons. With less concern for short-term volatility, they can benefit from the extra diversification and potentially higher returns that these subasset classes can provide.

With those considerations in mind, this series of investment portfolio examples is geared toward still-working people who are building up their retirement nest eggs. Morningstar’s Lifetime Allocation Indexes help shape their basic asset allocations. The portfolios are designed to be held in either tax-sheltered or taxable accounts.

Tax-Sheltered Model Portfolios for Savers

Building a portfolio that can support them through retirement is the primary financial goal for many investors. Retirement accounts like traditional IRAs and 401(k)s, and their Roth counterparts, support that goal by offering major tax benefits. Investors should take full advantage of these tax-sheltered accounts, especially if their employer offers further incentives, like a 401(k) match.

Like the portfolios for retirees, these tax-sheltered portfolios for savers are designed to be held in tax-sheltered accounts, so investors don’t have to worry about their tax burden and instead focus on building their retirement nest eggs.

Taxable Model Portfolios for Savers

Like retirees, savers should stay attuned to tax efficiency in their taxable accounts. Not only should they limit the trading they do in their portfolios, with an eye toward limiting taxable capital gains distributions, but they should also seek out stock funds that employ patient, low-turnover strategies.

The taxable portfolios focus on tax-managed and index funds for stock exposure and municipal-bond funds for fixed-income exposure. To be sure, broad-market index ETFs—and to a lesser extent traditional index funds—tend to have very low turnover and therefore distribute few taxable capital gains on an ongoing basis. They can be solid options for taxable accounts.

Savers will want to be sure to “rightsize” the components of these investment portfolios based on their ability to earn money, their risk tolerance and capacity, and the diversification of their tax-sheltered portfolios. For example, a 50-year-old who is focusing on stock funds within her 401(k) because her plan doesn’t offer many decent bond options may want a higher bond allocation in her taxable portfolio.

How Have Christine Benz’s Model Portfolios Performed?

Benz evaluates the performance of a core group of her model portfolios annually. She compares the portfolios’ performance with a blended benchmark of basic index funds that matches the portfolios’ asset-allocation exposure. The goal is to see whether security selection has added or subtracted value, an exercise you can conduct with your own portfolio.

How to Review Your Portfolio

These model portfolios depict sensible asset allocations for investors at various life stages, which can be helpful reference points as you build and benchmark your portfolio.

You should understand what you own before you make any changes to your portfolio, but that’s easier said than done if you don’t have the right tools. Having multiple investing accounts or owning funds that might have overlapping holdings can make it hard to know what you actually own. Morningstar Investor’s Portfolio tool lets you add your investments and instantly get an X-ray view into your portfolio. If your asset allocation has strayed away from your target, you can create duplicate copies of your portfolio and test the impact of buying or selling specific holdings.