Investing Specialists

3 Retirement Bucket Portfolios for Minimalists

Christine Benz

Editor's note: These portfolios were reviewed on June 10, 2019.

Everyone, it seems, is Kondo-izing.

Inspired by organizing consultant Marie Kondo's Netflix show and best-selling book, "The Life-Changing Magic of Tidying Up," people are filling up dumpsters with possessions that no longer "spark joy." Perhaps not coincidentally, Goodwill Stores have also seen a spike in donations of items that have done their jobs (and presumably have been thanked for their service).

Should your portfolio be next on your "To-Kondo" list? I'd say yes, emphatically yes. As with decluttering your home, winnowing down your number of accounts--and the holdings within them--can be incredibly clarifying. With fewer accounts and holdings, you can better focus on the really big determinants of your financial success: your asset allocation, your savings or spending rate, and your proximity to reaching your goals. You won't risk getting bogged down in small-bore jobs like assessing your portfolio's value/growth exposure or paying attention to earnings reports related to stocks that you own.

And just as a streamlined household is easier to clean, streamlining your portfolio makes it simpler to oversee it on an ongoing basis. Of course, no portfolio truly runs itself, unless you invest in a target-date fund. (And even then, I wouldn't recommend a target-date fund for when you're actually retired, as discussed here.) That's especially true in retirement, when you're necessarily trying to figure out how to extract some of your living expenses from your investments.

But if you stick with very basic investment building blocks for your portfolio, it will be simple to view and adjust your portfolio's asset allocation. You'll also be able to readily determine how you'll refill your cash bucket--the linchpin of a Bucket strategy--on an ongoing basis.

Before I go any further, I'll acknowledge that the idea for a minimalist portfolio isn't a new one. The Bogleheads have long enthused about a simple, three-fund portfolio composed of total market index funds, the subject of Taylor Larimore's fine recent book. Author Rick Ferri has proposed an even simpler "two-fund portfolio" that consists of a total world stock index fund and bonds. And Morningstar ETFInvestor features a series of new portfolios, including a "Basic Portfolio" that starts and ends with three total market index funds.

A Bucket Strategy for Minimalists
Yet as simple and elegant as a two- or three-fund portfolio is, my view is that retired investors should considering adding a fourth investment to their portfolios: cash. Setting liquid assets aside to meet near-term living expenses is the focus of the Bucket approach to retirement portfolio management. The principle is that the long-term investments--bond and stock holdings in Buckets 2 and 3, respectively--in the portfolio can and will move up, down, and sideways. But if a retiree knows that she has enough cash set aside in Bucket 1 to match living expenses that are coming right up, she can make peace with those gyrations.

I also like that a Bucket approach can make it easy to visualize how much to allocate to each asset class based on expected portfolio withdrawals; it takes asset allocation from the theoretical to the practical. Withdrawals for the next couple of years go in cash, to help ensure money never has to be plucked from bonds or stocks at a low ebb; withdrawals for the next eight or so years go in bonds; and the rest of the assets go into stocks. That way, in a worst-case scenario in which a calamitous bear market for stocks presents itself and lingers, a retiree would have a bulwark of roughly 10 years' worth of withdrawals in cash and bonds to "spend through" before touching the equity holdings.

By using portfolio withdrawals as the starting point, retirees can readily "rightsize" their allocations to each of the asset classes. For example, a retiree who's using a 4% initial withdrawal might steer 8% of his portfolio to cash (two years' worth of withdrawals), another 30% or so to bonds, and the remainder to stocks. Meanwhile, the (increasingly rare) retiree who's withdrawing just 2% of her portfolio per year because she has a pension could have smaller stakes in safe assets: 4% in cash, another 16% or so in bonds, and the remainder in stocks. (Of course, that assumes she can live with the swings that would accompany such an equity-heavy portfolio.) Thus, while the portfolios below include percentage allocations to each of the asset classes, my hope is that retirees will think through their own situations and planned withdrawals when allocating to each of the buckets. It's also important to underscore the importance of giving due attention to your withdrawal rate in the first place, as discussed here.

"Bucket maintenance" is another important aspect of implementing a Bucket strategy for your retirement portfolio. Bucket 1 is there for spending, but it will eventually need to be refilled. How best to do it? For all but extremely frugal retirees, relying exclusively on income distributions won't cut it. Even though yields have come up significantly in the past few years, a minimalist Bucket portfolio composed of cash, a total market index bond fund, and two equity funds (domestic and international) won't clear a 3% yield today. Instead, Bucket-oriented retirees employing total market index funds for their portfolios will need to employ rebalancing as a component of their cash flow strategies, as discussed here. Because rebalancing opportunities won't come up each and every year (see: 2018), that accentuates the value of holding two years' worth of living expenses in Bucket 1.

The Holdings
To populate the portfolios below, I've employed Vanguard Total Market Index funds as building blocks. The funds are available as exchange-traded funds or traditional index funds; the format is a matter of individuals' own preferences. However, it's worth noting that an investor could readily replicate a nearly identical portfolio using holdings from other firms. Schwab, Fidelity, and iShares all offer fine, low-cost index funds that provide "total market" exposure to the core asset classes. The products are largely fungible; go with the provider you like best.

It's also important to note that I've crafted the portfolios without regard for tax efficiency--in other words, I'm assuming that investors will hold them within the confines of a tax-sheltered portfolio like an IRA. However, the portfolios could readily be modified for taxable portfolios, swapping in a good core municipal bond fund such as  Vanguard Tax-Exempt Bond Index (VTEAX),  Vanguard Intermediate-Term Tax-Exempt (VWIUX),  Fidelity Intermediate Municipal Income (FLTMX), or  T. Rowe Price Summit Intermediate Municipal Income (PRSMX) in place of the taxable-bond fund.

In addition, given that these portfolios are designed to be ultrastreamlined, it's worth noting that some worthy categories got left on the cutting room floor, especially on the bond side. For example, total bond market index-trackers like  Vanguard Total Bond Market Index (VBTLX) don't include allocations to Treasury Inflation-Protected Securities or high-yield bonds, so these portfolios don't, either. And, as noted above, the portfolios don't include a dedicated allocation to short-term bonds. That accentuates the case for holding two years' worth (rather than one year's worth) of portfolio withdrawals in cash. In contrast with my other Bucket portfolios, there aren't any short-term bond holdings that could be tapped as "next-line reserves" in a year like 2018, when neither stocks nor bonds performed well. 

And because these portfolios don't include discrete holdings within asset classes--for example, dedicated growth and value funds--they won't facilitate the "surgical" type of rebalancing on display in my Bucket portfolio "stress tests."

Aggressive Retirement Bucket Portfolio for Minimalists
Time horizon/life expectancy: 25-30 years
Baseline asset allocation: 60% equity/40% bonds and cash
Current Yield: 2.55%

8%: Cash
32%: Vanguard Total Bond Market Index (VBTLX)/(BND)
40%: Vanguard Total Stock Market Index (VTSAX)/(VTI)
20%: Vanguard Total International Stock Index (VTIAX)/(VXUS)

Moderate Retirement Bucket Portfolio for Minimalists
Time horizon/life expectancy: 20-25 years
Baseline asset allocation: 50% equity/50% bonds and cash
Yield: 2.62%

10%: Cash
40%: Vanguard Total Bond Market Index
35%: Vanguard Total Stock Market Index
15%: Vanguard Total International Stock Index

Conservative Minimalist Bucket Portfolio
Time horizon/life expectancy: 15 years
Baseline asset allocation: 40% equity/60% bonds and cash
Yield: 2.67%

12%: Cash
48%: Vanguard Total Bond Market Index
30%: Vanguard Total Stock Market Index
10%: Vanguard Total International Stock Index

Christine Benz has a position in the following securities mentioned above: VWIUX. Find out about Morningstar's editorial policies.