Tax-Sheltered ESG Retirement-Bucket Portfolios for Mutual Fund Investors

I’ve created model Bucket portfolios featuring exposure to environmental, social, and governance funds. These portfolios are geared toward retirees’ tax-deferred accounts that they are actively drawing upon to provide them with cash flows.

About the Portfolios

These model portfolios are geared toward retired investors who are drawing upon their tax-sheltered accounts to meet a portion of their living expenses. Bucket 1 of each portfolio is to provide money for cash needs for a year or two, so we’re not taking any risks with it; investors can use some combination of certificates of deposit, high-yield savings accounts, or money market mutual funds for this portion of the portfolio. Bucket 2 covers another eight or so years’ worth of cash flow needs. It’s designed to deliver slightly more income than Bucket 1, as well as a dash of inflation protection and capital appreciation; thus, it consists mainly of high-quality short- and intermediate-term bonds. Bucket 3 is the growth engine of each of the portfolios, geared toward years 11 and beyond of retirement.

The portfolios consist exclusively of funds that earn Medalist Ratings Gold, Silver, or Bronze, meaning our analysts think they’re likely to outperform their peers over a full market cycle. I’ll make changes to the holdings only if their fundamentals change or they no longer rate as higher-conviction Morningstar Medalists.

My ESG ETF portfolios are designed to limit tracking error relative to broad market indexes. As such, they’re less ESG-forward than their mutual fund counterparts. With the mutual fund portfolios, I’ve focused on funds with more ESG-forward strategies, especially on the equity side. Because the mutual fund portfolios encompass a heavier ESG emphasis, I would expect them to exhibit performance that differs more meaningfully from market benchmarks than the ETF portfolios. Because the mutual fund portfolios include at least some active equity exposure, their costs are obviously higher, too. I focused on funds that are widely available from major brokerage-firm platforms without a load or transaction fee.

How to Use These Portfolio Examples

Note that the goal of these portfolios isn’t to generate the best returns of any retirement portfolio on record, but rather to help retirees and preretirees visualize what a long-term, strategic total-return portfolio would look like. Thus, a newly retired investor could follow the basic Bucket concept without completely upending existing favorite holdings.

Investors should take care to customize their portfolios to suit their own situations—risk tolerance and capacity, of course, but also planned spending. An investor’s own cash bucket, and in turn the allocations to the other two buckets, will depend on his or her portfolio spending rate. If an investor is using a lower starting withdrawal rate—say, 3% in the first years of retirement—Bucket 1 would accordingly be smaller (6% versus 8% in my Aggressive portfolio).

Investors who are seeking more indexlike performance and/or those who would like to lower their total costs can reasonably employ any number of fine core ESG index funds or ETFs in place of the actively managed options featured here.

Aggressive Tax-Sheltered ESG Retirement-Bucket Portfolio for Mutual Fund Investors

• Anticipated Time Horizon in Retirement: 25-plus years
• Risk Tolerance/Capacity: High
• Target Stock/Bond/Cash Mix: 60/32/8

Bucket 1: Years 1-2

• 8% cash

Bucket 2: Years 3-10

• 8%: Vanguard Short-Term Federal VSGDX
• 8%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
• 16%: Pimco Total Return ESG PTSAX

Bucket 3: Years 11 and Beyond

• 28%: Calvert US Large Cap Core Responsible Index CSXAX
• 12%: Boston Trust Walden SMID Cap WASMX
• 20%: Calvert International Responsible Index CDHAX

Moderate Tax-Sheltered ESG Retirement-Bucket Portfolio for Mutual Fund Investors

• Anticipated time horizon in retirement: 15–25 years
• Risk Tolerance/Capacity: Moderate
• Target Stock/Bond/Cash Mix: 50/40/10

Bucket 1: Years 1-2

• 10%: Cash

Bucket 2: Years 3-10

• 10%: Vanguard Short-Term Federal VSGDX
• 10%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
• 20%: Pimco Total Return ESG PTSAX

Bucket 3: Years 11 and Beyond

• 24%: Calvert US Large Cap Core Responsible Index CSXAX
• 11%: Boston Trust Walden SMID Cap WASMX
• 15%: Calvert International Responsible Index CDHAX

Conservative Tax-Sheltered ESG Retirement-Bucket Portfolio for Mutual Fund Investors

• Anticipated time horizon in retirement: Fewer than 15 years
• Risk Tolerance/Capacity: Low
• Target stock/bond/cash mix: 40%/48%/12%

Bucket 1: Years 1-2

• 12%: Cash

Bucket 2: Years 3-10

• 10%: Vanguard Short-Term Federal VSGDX
• 10%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
• 28%: Pimco Total Return ESG PTSAX

Bucket 3: Years 11 and Beyond

• 20%: Calvert US Large Cap Core Responsible Index CSXAX
• 8%: Boston Trust Walden SMID Cap WASMX
• 12%: Calvert International Responsible Index CDHAX