7 Best Vanguard Funds for Retirement

These top Vanguard funds will help set you up for retirement.

Retirees tend to have very different investment needs compared to younger investors. For one thing, their objective is to sustain a safe, perpetual withdrawal rate from their portfolio without depleting it prematurely. Retirees’ risk tolerance is also lower, as high volatility can mean dramatic fluctuations in portfolio value, which can negatively affect cash flows. Finally, their time horizon tends to be shorter given their advanced age. Therefore, a retiree’s portfolio should comprise a balanced blend of high-quality stocks, government and investment-grade bonds, along with cash-like assets tailored to these aforementioned considerations. A great way of accessing these asset classes in an inexpensive, transparent manner is via Vanguard mutual funds and exchange-traded funds, or ETFs. Vanguard funds boast some of the lowest expense ratios in the industry, which bodes well for long-term returns. Here are the seven best Vanguard funds for retirement.

Vanguard Wellesley Income Fund (ticker: VWINX)

VWINX has a long and storied history. Debuting in 1970, this mutual fund survived the 1987 stock market crash, the 2000 dot-com bubble and the 2007 to 2009 Great Recession to post an impressive annualized return of 9.33% since inception. The fund normally targets a ratio of one-third stocks to two-thirds bonds, but it currently consists of 37.8% stocks, 60.5% bonds and 1.7% cash, as it’s between rebalancing cycles. VWINX is actively managed, with the objective of targeting high, sustainable current income plus moderate long-term capital appreciation potential. On the bond side, VWINX holds investment-grade corporate bonds of all maturities plus some Treasury bonds and mortgage-backed securities. On the stock side, VWINX focuses on holding no more than 100 large-cap U.S. stocks with above-average dividends and income growth, along with low price-earnings and price-book ratios. The fund costs an expense ratio of 0.23%.

Vanguard Wellington Fund Investor Shares (VWELX)

VWINX’s older sibling is VWELX. This fund is currently the oldest balanced mutual fund in the U.S. market still in operation. Debuting in 1929, VWELX survived the Great Depression, World War II and all the other market crashes that ensued to post an annualized 8.24% return since its inception. Retirees who find VWINX’s asset allocation too conservative might like VWELX better, as this fund targets an allocation of two-thirds stocks and one-third bonds. Otherwise, VWELX employs the same stock and bond screening methodology as VWINX, with a focus on investment-grade corporate bonds and undervalued large-cap U.S. stocks trading at attractive valuations. The fund costs an expense ratio of 0.24%.

Vanguard Balanced Index Fund Admiral Shares (VBIAX)

Some retirees might not like the active management approach of VWELX and VWINX. Although both funds have performed well historically, there is no guarantee that this will continue in the future. Both VWELX and VWINX also charge higher expense ratios than many other Vanguard funds, too. For a passively managed mutual fund that follows an indexing approach, investors can buy VBIAX. This fund holds a 60/40 portfolio of broad-market, U.S. stocks and bonds, tracking the Dow Jones U.S. Total Stock Market Index and the Bloomberg Aggregate Bond Index, respectively. Since its inception in November 2000, VBIAX has returned an annualized 6.32%. This fund is significantly cheaper than the previous two with an expense ratio of 0.07%, but it requires a minimum investment of $3,000.

Vanguard Target Retirement 2025 Fund (VTTVX)

A great hands-off fund for retirees is a target-date fund. These funds contain a predetermined mix of stocks and bonds and will automatically adjust this ratio on a “glide path” to become more conservative over time. A great target-date fund for those looking to retire between 2023 and 2027 is VTTVX. Currently, this fund comprises 33.6% U.S. stocks, 23.1% international stocks, 27.7% U.S. bonds, 12.3% international bonds, and 3.3% Treasury Inflation-Protected Securities, or TIPS. The automated nature of a target-date fund can help retirees worry less about managing their investment portfolios and ensure better investment behaviors. VTTVX is also fairly cheap, with an expense ratio of 0.08%. The fund requires a minimum investment of $1,000.

Vanguard Total World Stock ETF (VT)

On the other hand, some retirees like to manage their own investment portfolios. For these investors, using ETFs might offer greater flexibility. ETFs can be traded throughout the day like stocks and can potentially offer better tax efficiency than mutual funds. A highly diversified ETF to use for a portfolio’s stock allocation is VT, which tracks the world’s investable stock market. This ETF holds more than 9,500 stocks from U.S., international developed and international emerging markets, according to their current market-cap weights. As the world’s market evolves, VT will change along with it. Thus, buying and holding VT is a great way of ensuring your stock allocation matches the market’s average return. VT costs an expense ratio of 0.07%.

Vanguard Total World Bond ETF (BNDW)

Splitting a retirement portfolio up into separate stock and bond ETFs allows retirees to fine-tune their asset allocation to match their risk tolerance. With this approach, you don’t have to rely on rigid allocations with nice, round numbers like the 60/40 or 40/60 portfolio. For retirees using VT for their stock allocation, an excellent counterpart for bond allocation is BNDW. This ETF tracks the Bloomberg Global Aggregate Float-Adjusted Composite Index by holding more than 17,000 government and investment-grade corporate bonds from U.S., international developed and international emerging markets according to their market-cap weights. BNDW is an excellent way to diversify a bond allocation at a low cost, given its 0.06% expense ratio.

Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)

One of the biggest risks to a retiree’s investment portfolio is high inflation. This, combined with rapidly rising interest rates, can cause even high-quality bonds to lose value, as they did throughout 2022. An allocation to short-term TIPS can solve this problem. When inflation spikes, the value of TIPS and their coupons go up. A good ETF to buy in this space is VTIP, which holds short-term TIPS with an average maturity of 2.5 years. The ETF has a low duration of 2.4 years. This means that if interest rates went up by 1%, VTIP would be expected to lose 2.4% in value, all else being equal. Currently, the ETF has an average yield-to-maturity of 4.1%, which is the return an investor could expect if they held all of the underlying bonds to maturity. VTIP costs an expense ratio of 0.04%.

7 best Vanguard funds for retirement:

— Vanguard Wellesley Income Fund (VWINX)

— Vanguard Wellington Fund Investor Shares (VWELX)

— Vanguard Balanced Index Fund Admiral Shares (VBIAX)

— Vanguard Target Retirement 2025 Fund (VTTVX)

— Vanguard Total World Stock ETF (VT)

— Vanguard Total World Bond ETF (BNDW)

— Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)

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7 Best Vanguard Funds for Retirement originally appeared on usnews.com

Update 12/22/22: This story was previously published at an earlier date and has been updated with new information.

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