Social Security benefits may ensure a baseline standard of living for retirees, but having a well-constructed retirement portfolio on hand can significantly enhance your golden years. To build this portfolio before it’s too late, investors must focus on maximizing contributions, taking advantage of any employer plan matches, and staying the course.
With the average lifespan in the U.S. increasing steadily since 1969, investors must plan for a much longer post-retirement life, which necessitates larger portfolios. Withdrawals from a retirement portfolio must be capable of meeting not only basic living expenses, but also discretionary expenses like travel and emergency expenses like health care.
For younger investors, the focus is on growing an investment portfolio to a sufficient size by retirement. For older investors on the cusp of retirement, the priority is preservation of capital and consistent income. Optimizing a portfolio to balance around these considerations involves fine-tuning both its initial investment selection and subsequent asset allocation.
When it comes to investment selection, many retirees opt for both mutual funds and exchange-traded funds, or ETFs, managed by Vanguard. Vanguard stands apart from other asset management firms due to its structure: The firm is ultimately owned by the shareholders in its funds.
This investor-centric philosophy has guided many of Vanguard’s decisions, which include the launch of the first commercially viable index fund in 1976, eliminating sales charges on fund purchases in 1977, launching individual retirement account and 401(k) services in 1981, and unveiling the first bond index fund in 1986.
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Today, Vanguard funds boast some of the lowest fees in the industry. According to the firm, the average Vanguard mutual fund or ETF has an expense ratio 82% lower than the industry average. For retirement investors, this means more money staying in your savings and compounding.
Here’s a look at the seven best Vanguard funds that experts recommend for a retirement portfolio:
— Vanguard Target Retirement 2060 Fund (ticker: VTTSX)
— Vanguard Target Retirement 2025 Fund (VTTVX)
— Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
— Vanguard LifeStrategy Income Fund (VASIX)
— Vanguard Total Stock Market ETF (VTI)
— Vanguard Total International Stock ETF (VXUS)
— Vanguard Ultra-Short Bond ETF (VUSB)
Vanguard Target Retirement 2060 Fund (VTTSX)
“Vanguard Target Retirement funds are a good option for retirement,” says Sean August, CEO of The August Wealth Management Group. “These funds invest in a mix of stocks and bonds and automatically adjust the asset allocation as the target date approaches,” August says. This is known as a “glidepath,” which usually involves increasing the proportion of bonds and cash to lower volatility and drawdowns.
For millennial investors born between 1993 and 1997, Vanguard suggests VTTSX, which is intended for investors targeting a retirement date of 2060. The fund comprises numerous other Vanguard index funds, with 54% in U.S. stocks, 36.5% in international stocks, 6.8% in U.S. bonds and 2.7% in international bonds. VTTSX charges a 0.08% expense ratio, or $8 annually for every $10,000 invested.
Vanguard Target Retirement 2025 Fund (VTTVX)
Older investors born between 1958 and 1962 will likely find the asset allocation of VTTSX to be too aggressive and equity heavy for their risk tolerance. In this case, a closer-dated Target Retirement Fund like VTTVX might be ideal. This fund is intended for investors looking to retire by 2025, and thus holds a much more conservative asset allocation.
Like VTTSX, VTTVX also makes use of various underlying Vanguard index funds. Right now, the fund is 33.3% U.S. stocks, 28% U.S. bonds, 23.3% international stocks and 12% international bonds. Unlike VTTSX, VTTVX also includes a 3.4% allocation to short-term Treasury Inflation-Protected Securities, or TIPS, to protect against rising interest rates and inflation. The fund also charges a 0.08% expense ratio.
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Investors who prefer a fixed asset allocation can opt for Vanguard’s LifeStrategy fund lineup. Unlike the Target Retirement fund suite, LifeStrategy funds stick to a predetermined static asset allocation and do not adjust over time. Thus, they can be suitable for an investor who is already retired and has their risk tolerance and income needs figured out.
“VSCGX can work well for investors that understand the volatility that can come with around 40% in equities and 60% in bonds,” says Paul Peeler, financial advisor at Integrated Financial Group. Vanguard describes this fund as ideal for investors who care about current income but still want some growth potential. VSCGX charges a 0.12% expense ratio.
Vanguard LifeStrategy Income Fund (VASIX)
“The LifeStrategy funds are an all-in-one solution, meaning once the investment is made, Vanguard handles the periodic rebalancing within its underlying index fund holdings,” Peeler says. “For very risk-averse retirees, VASIX with 20% in equities and 80% in bonds might be more appropriate,” he says. VASIX is intended for investors wishing to minimize their exposure to stock market risk.
With 80% of its holdings in bonds, VASIX has limited growth potential, focusing more on preservation of capital and current income. The fund’s underlying holdings currently include 56.2% in U.S. bonds, 24.2% in international bonds, 11.5% in U.S. stocks and 8.1% in international stocks. VASIX currently charges a 0.11% expense ratio and pays a 30-day SEC yield of around 2%.
[How Retirement Investors Can Protect Investments From Inflation]
Vanguard Total Stock Market ETF (VTI)
“Our firm prefers ETFs since they generally have lower fees than mutual funds, making them a cost-effective option for retirement investing,” August says. “Additionally, ETFs tend to be more tax efficient than mutual funds and allow for intraday trading.” For an ETF pick, August suggests VTI, which can serve as a core broad-market U.S. equity holding in a portfolio.
“This ETF tracks the CRSP US Total Market Index, which includes small-, mid- and large-cap U.S. stocks weighted by market cap,” August says. VTI is extremely diversified, with over 3,900 holdings from all 11 stock market sectors. This ETF is extremely popular among investors, currently sporting around $280 billion in assets under management. VTI charges a low expense ratio of 0.03%.
Vanguard Total International Stock ETF (VXUS)
Geographical diversification is a good idea for most retirees. Despite the strong performance of the U.S. market over the last decade, it’s worth remembering that this wasn’t always the case. Between the years of 1999 to 2009, the U.S. market stagnated heavily, returning an annualized minus 0.9%. Investors who retired with a U.S.-only portfolio during this “lost decade” had to endure dismal returns.
To mitigate this, investors can pair VTI with an international stock ETF. August likes VXUS, which he describes as “a good option for broad-market international equity exposure.” “This ETF invests in a mix of developed and emerging markets, which provides exposure to market-cap-weighted stocks outside of the U.S.,” August says. VXUS costs a 0.07% expense ratio.
Vanguard Ultra-Short Bond ETF (VUSB)
The rising interest rate environment of 2022 proved to be the weakness of many bond funds. Some bond index funds with a higher duration, a measure of interest rate sensitivity, suffered losses nearly as deep as stocks. To mitigate this, retirees with a low risk tolerance could consider actively managed bond ETFs like VUSB that target high-quality holdings with a short duration.
“A short duration can limit the downside from an uptick in rates, and also tends to be a good diversifier to investment-grade bonds,” says John Croke, head of active fixed income product management at Vanguard. “VUSB’s attractive current 30-day SEC yield of 4.76% as of Feb. 23 can provide investors a compelling return,” Croke says. VUSB charges a 0.1% expense ratio, the lowest in this list.
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7 Best Vanguard Funds for Retirement originally appeared on usnews.com
Update 03/02/23: This story was previously published at an earlier date and has been updated with new information.
