Tax-Sheltered Retirement-Bucket Portfolios for Mutual Fund Investors

So much of investing during retirement comes down to the luck of the draw.

Prevailing interest rates could be high, enabling retirees to subsist exclusively on their stock and bond income. Or retirees could experience a period like 2005-20 when interest rates plummeted, and even risky securities delivered miserly income payouts. Stock market values can also be unpredictable. People who embarked on retirement in 2010 enjoyed a nearly unbroken streak of gains from stocks for a decade, while those who hung it up in 2020 have put up with a lot more volatility, including substantial losses from stocks and bonds in 2022. (Recent retirees have still had it pretty good, though.)

The Bucket approach to retirement portfolio allocation is designed to help retirees source their cash flows, no matter what is going on with interest rates and stock and bond values. By maintaining an ongoing allocation to cash alongside a balanced portfolio, the retiree can withdraw funds from those liquid reserves when stock and/or bond values are in a trough. That allocation provides a psychological benefit, too, in that having cash on hand can help retirees cope with the volatility that will inevitably accompany their long-term holdings. In better market environments, retirees can source their cash flow needs from appreciated equity or bond holdings and not touch the cash.

About the Portfolios

These model portfolios are geared toward retired investors who are drawing upon their tax-sheltered accounts, like IRAs, 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 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; thus, it consists mainly of high-quality short- and intermediate-term bond funds. Bucket 3 is the growth engine of each of the portfolios, geared toward years 11 and beyond of retirement. Owing to an anchor position in Vanguard Dividend Appreciation Index VDADX, which focuses on companies with a history of growing their dividends, the portfolio has a high-quality tilt appropriate for a retirement portfolio.

The portfolios consist exclusively of funds with Morningstar Medalist Ratings of 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 are no longer highly rated.

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 cash bucket, and in turn the allocations to the other two buckets, will depend on their 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).

Aggressive Tax-Deferred 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 (certificates of deposit, money market accounts, and so on)

Bucket 2: Years 3-10

• 8%: Fidelity Short-Term Bond FSHBX
• 7%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
• 10%: Fidelity Total Bond FTBFX
• 7%: Vanguard Wellesley Income VWIAX

Bucket 3: Years 11 and Beyond

• 25%: Vanguard Dividend Appreciation Index VDADX
• 15%: Vanguard Total Stock Market Index VTSAX
• 20%: American Funds International Growth and Income IGIFX

Moderate Tax-Deferred 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%: Fidelity Short-Term Bond FSHBX
• 10%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
• 12%: Fidelity Total Bond FTBFX
• 5%: Vanguard Wellesley Income VWIAX
• 3%: Fidelity Floating Rate High Income FFRHX

Bucket 3: Years 11 and Beyond

• 25%: Vanguard Dividend Appreciation Index VDADX
• 10%: Vanguard Total Stock Market Index VTSAX
• 15%: American Funds International Growth and Income IGIFX

Conservative Tax-Deferred 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 (certificates of deposit, money market accounts, and so on)

Bucket 2: Years 3-10

• 10%: Fidelity Short-Term Bond FSHBX
• 10%: Vanguard Short-Term Inflation-Protected Securities Index VTAPX
• 15%: Fidelity Total Bond FTBFX
• 5%: Vanguard Wellesley Income VWIAX
• 5%: Fidelity Floating Rate High Income FFRHX
• 3%: Loomis Sayles Income LSBRX

Bucket 3: Years 11 and Beyond

• 20%: Vanguard Dividend Appreciation Index VDADX
• 8%: Vanguard Total Stock Market Index VTSAX
• 12%: American Funds International Growth and Income IGIFX