(PUB) Investing 2016

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How Has the Retirement Bucket Strategy Performed? Portfolio Matters | Christine Benz

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 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,

Bucket 1: $120,000 $120,000: Cash

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 3: $900,000 $400,000: Vanguard Dividend Growth VDIGX

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 $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. 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