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The drought continues for investors aiming to
wring any type of yield from high-quality bonds, not
to mention cash.
Although the Federal Reserve raised short-term
interest rates by
0
.
25%
in
2015
—and is likely to do
so at least twice more in
2016
—that was a drop
in the bucket. Cash yields remain stubbornly close to
zero, and high-quality bond yields are just about
2%
–
3%
—hardly a subsistence level for most retirees.
Helping retirees create a cash flow from their
portfolios, even in an income-starved environment,
has been a key goal of my “bucket” portfolios.
The bucket portfolios are, at heart, conventional total
return portfolios—but with the addition of a cash
“bucket” to help ensure stable in-retirement cash flows
despite the inevitable fluctuations in the long-term
portfolio components. The liquidity bucket is periodically
refilled using income, rebalancing proceeds, or a
combination of the two.
I’ve created a number of bucket portfolios over the
past few years, targeting retirees at different life
stages with varying risk tolerances and risk capacities.
Some of these portfolios consist of traditional
mutual funds (including some traditional index funds),
and I’ve also developed bucket portfolios composed
of exchange-traded funds. And for investors who prefer
to use a single brokerage firm or fund company, I’ve
created single-firm bucket portfolios from Vanguard,
Fidelity, T. Rowe Price, and Schwab.
The portfolios consist of Morningstar researchers’
top-rated mutual funds and
ETF
s, and they harness
asset-allocation research from Morningstar Invest-
ment Management. For those reasons, I expect them
to perform well over time. But unlike many other
model portfolios on offer, the goal of these portfolios
isn’t to crush it on the performance front. Rather,
my aim is to showcase sound practices for in-retire-
ment portfolio management. Investors should feel
free to swap in their own favorite funds in place of the
portfolio’s holdings.
To help illustrate how the portfolios would have
behaved in varying market climates, as well as how a
retiree would extract cash flows from them on an
ongoing basis, I’ve periodically provided performance
updates, along with data illustrating investment
returns and the portfolio-management regimen. My
last performance review was in fall
2014
. With
two more calendar years of performance in the rearview
mirror, I’ll discuss the performance and portfolio
management since then.
Portfolio Review
Before we get into performance, here’s an overview
of the baseline bucket portfolio used in this perform-
ance illustration, along with the initial portfolio values.
Note that the portfolio is geared toward a
65
-year-old
couple with a moderate risk tolerance.
The portfolio assumed a 4% initial withdrawal in 2000,
with that dollar amount inflation-adjusted each year.
The portfolio was regularly rebalanced to help deliver
cash flows. Readers can see complete details on
How Has the Retirement Bucket
Strategy Performed?
Portfolio Matters
|
Christine Benz
Bucket 3: $900,000
$400,000: Vanguard Dividend Growth VDIGX
Note that the stress test features T. Rowe Price Equity Income
PRFDX instead of this fund, because the Vanguard fund had
a different mandate in 2000, the start date of the stress test.
$200,000: Harbor International HAINX
$100,000: Vanguard Total Stock Market Index VTSMX
$125,000: Loomis Sayles Bond LSBRX
$75,000: Harbor Commodity Real Return Strategy HACMX
Because this fund didn’t exist in 2000, the start of the stress
test, we’ve swapped in Oppenheimer Commodity Strategy Real
Return QRAAX instead.
Bucket 2: $480,000
$130,000: Fidelity Short-Term Bond FSHBX
$150,000: Harbor Bond HABDX
$100,000: Harbor Real Return HARRX
$100,000: Vanguard Wellesley Income VWINX
Bucket 1: $120,000
$120,000: Cash