This portfolio is geared toward retirees with a 20-year time horizon and moderate risk tolerance.
By Christine Benz | 09-20-16 | 06:00 AM | Email Article

Bucket 1: Years 1-2

  • 10%: Cash (certificates of deposit, money market funds, and so on)

The goal of this portion of the portfolio is to lock down money needed for near-term living expenses; income production is secondary. Therefore, it holds true cash instruments rather than venturing into investments such as ultrashort funds, which may at times deliver higher yields but do so at the expense of principal volatility.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

Bucket 2: Years 3-10

  • 10%:  Fidelity Short-Term Bond
  • 5%:  Fidelity Floating Rate High Income  
  • 15%:  Harbor Bond  
  • 5%: Vanguard Short-Term Inflation-Protected Securities
  • 5%:  Vanguard Wellesley Income  

Bucket 2 is designed to deliver a higher level of income than bucket one; it also aims to preserve purchasing power with a dash of capital appreciation. The risk level in this portfolio stair-steps gradually upward. The Fidelity Short-Term Bond fund would serve as next-line reserves in case bucket one were to become depleted and rebalancing proceeds and/or portfolio income were insufficient to meet living expenses. I've also included a slice of a floating-rate, or bank-loan, fund. This Fidelity fund, while potentially sensitive to the credit cycle, should hold its ground and even gain in a period of rising interest rates. Harbor Bond, a near-clone of  PIMCO Total Return , remains the portfolio's largest bond holding.

Because this portion of the portfolio has a longer time horizon, inflation protection is a concern. Vanguard Short-Term Inflation-Protected Securities delivers inflation protection without a lot of interest-rate-related volatility. Investors could also use individual I Bonds in this slot, too. 

A position in Vanguard Wellesley Income, which features a roughly 60% bond/40% stock allocation, is the longest-term component of the portfolio, providing both income and a shot of capital appreciation. 

Bucket 3: Years 11 and Beyond

The long-term portion of the portfolio, geared toward growth, generally mirrors bucket three of the aggressive portfolio. It includes a high-quality equity emphasis with its position in Vanguard Dividend Appreciation, but it also features broad-ranging sector exposure owing to the total market U.S. index fund. (The original version of this portfolio featured  Vanguard Dividend Growth  in lieu of Vanguard Dividend Appreciation, but the former closed to new investors in July 2016.) Harbor International features experienced managers who employ a disciplined process. I also continue to like Loomis Sayles Bond for the long term. Although I've been concerned about investors' stampede into aggressive, credit-sensitive bond types, Loomis' flexibility to invest in foreign bonds, convertibles, and even stocks is an advantage. Just be sure to hold any such fund among your longest-term assets rather than in bucket 2. 

Keeping the position in Harbor Commodity Real Return, in place to provide some inflation protection, is more controversial. Not only have commodities prices slumped as a result of slack demand from emerging markets, but this fund's bond portfolio has also proved quite interest-rate-sensitive because it emphasizes TIPS. I'm retaining the position because our anticipated holding period for it is quite long--10-plus years--offering enough time to ride out interest-rate-related volatility and provide our desired hedge against inflation. 

Securities mentioned in this article



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