A ‘Bucket’ ETF Retirement Strategy for Moderate Investors
November 2nd at 3:00pm by Tom Lydon
For those seeking to invest toward their Golden Years, exchange traded fund products provide low-cost, diversified exposure to broad asset classes, allowing investors to remain hands-off and spend less time worrying about their nest egg.
Christine Benz, Morningstar‘s director of personal finance, outlines a moderately conservative retirement investment plan with a 20-year time horizon that allocates about 50% to bonds and “other,” 10% cash and 40% stocks in a three-step, “bucket” strategy. [ETFs Have Room for Growth in Retirement Plans]
“A bucket strategy enables you to back into an appropriate asset allocation given your income needs, and it also might help you mentally endure the fluctuations that invariably accompany volatile asset classes such as stocks and commodities,” Benz said.
Benz’s first bucket covers near-term living expenses, the second bucket is for the middle part of an investor’s time frame and the last bucket is equity heavy.
In constructing the bucket strategy portfolio, Benz assumes it is for a married couple with a 20-year hands-off time frame, moderate risk tolerance, $1 million in total portfolio assets, 5% withdrawal rate per year, desire to spend all of their nest egg and assets held in a tax-sheltered account.
The three bucket breakdowns include:
- The first bucket for 1-2 years will consist of 10% cash allocations, such as certificates of deposit, checking, saving accounts and money market accounts, like the PIMCO Enhanced Short Maturity Fund (NYSEArca: MINT). This liquidity component will help retirees have enough cash on hand for one or two years.
- The second bucket, with a target date of 3 to 12 years, aims to provide income, stability and inflation protection while accruing modest capital growth. Benz suggests allocations like Vanguard Short-Term Bond ETF (NYSEArca: BSV) 7.5%, PowerShares Senior Loan Portfolio (NYSEArca: BKLN) 7.5%, PIMCO Total Return ETF (NYSEArca: BOND) 15%, iShares Barclays TIPS Bond (NYSEArca: TIP) 7.5% and Vanguard Dividend Appreciation (NYSEArca: VIG) 12.5%. The bucket provides a solid mix of income generating assets with protection against rising interest rates and some exposure to quality company names.
- The third bucket, which covers 13-20 years, will be the main growth engine of the overall investment portfolio, focusing on equities and aggressive fixed-income exposure. This segment includes Vanguard Dividend Appreciation (NYSEArca: VIG) 10%, Vanguard Total Stock Market Index (NYSEArca: VTI) 10%, Vanguard FTSE All-World ex-U.S. ETF (NYSEArca: VEU) 10%, PowerShares DB Commodity Index Tracking (NYSEArca: DBC) 5%, SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) 2.5% and WisdomTree Emerging Markets Local Debt (NYSEArca: ELD) 2.5%.
The investor will have to shift assets from buckets 3 to 2 and 2 to 1, creating a more cash heavy portfolio to meet income needs.
For more information on investing toward retirement, visit our retirement category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.