Simple Retirement Portfolio Strategies

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Includes: VASIX, VDIGX, VFISX, VFITX, VWELX, VWINX, VWITX
by: Charles Bolin
Summary

Three simple buy-and-hold portfolios are evaluated for retirement based on comments from my last article.

Six Vanguard Mutual Funds are evaluated using Portfolio Visualizer from January 2015 through the end of 2019.

The first portfolio selected is 15% short-term Treasuries and 85% Vanguard Wellesley. The other two are based on Maximizing Return at 5% Volatility and Maximum Sharpe Ratio.

The cumulative return for the next decade or more is destined to be below the historical average. This is the result of the market's normalized P/E being relatively high, consistent with the economy's low inflation rate... Limiting losses reduces the amount of gain required to achieve higher compounded returns. There is no reason to exclude stocks in the current environment, yet it may be appropriate to adjust portfolios toward risk management given the market's vulnerabilities. - "Crestmont Research", Ed Easterling

Introduction

There were good comments to my last article, "Evaluating Low-Risk Portfolio Strategies" centered around just investing in the Vanguard Wellesley Fund (VWINX), adding two to four years of cash, and adding the Vanguard Dividend Growth (VDIGX) fund. I included the Vanguard Interm-Term Tx-Ex (VWITX) because one reader expressed an interest in municipal bonds. VWITX has returned 3.6% over the past 15 years compared to 3.6% for the Vanguard Interm-Term Treasury Fund Inv (VFITX).

For this article, I created three one-million-dollar portfolios using these recommendations. I used the time period from 2005 through 2018 to include a full business cycle from top of the market to top of the market. Portfolio Visualizer "Backtest Portfolio Asset Allocation" is used for the comparison. The link is provided here for readers interested in running their own scenarios. Taxes are not considered as there are unlimited scenarios.

This article evaluates three portfolios using Portfolio Visualizer:

  1. 85% Vanguard Wellesley (VWINX) and 15% Short Term Treasury (VFISX)
  2. Funds that "Maximize Return at 5% Volatility"
  3. Funds that "Maximize Sharpe Ratio"

The inflation-adjusted results are shown below. The 85% Wellesley and 15% short-term Treasuries perform similar to the Maximum Return option; I chose 5% volatility which is less than the Wellesley Fund (5.8%) just to show a contrasting portfolio. The Maximum Sharpe Ratio maximizes the return for the level of volatility.

Retirement Portfolio

Withdrawals

For those who have saved enough for retirement and have a portfolio, the goal is to live off of the income. I think that that's definitely a very valid strategy. One potential con there is that, if your portfolio isn't growing, you are going to have less and less income throughout retirement based upon inflation. That's kind of a concern if you are thinking about maintaining a constant standard of living; you might not do that through that kind of portfolio unless it's growing over time. - "4 Retirement-Withdrawal Strategies", Christine Benz with David Blanchett at Morningstar

Assumptions are that $3,333 (4% of $1M) is withdrawn monthly, adjusted for inflation and the portfolio is rebalanced annually. Inflation averaged 2% per year (32% for the 14 years). First year withdrawals are $40,000 per year in 2005, increasing to $52,780 in 2018. The 4% withdrawal appears to be sustainable for the more aggressive allocations, but may be too high for the Maximum Sharpe Ratio Portfolio, depending upon circumstances.

Funds Considered

Portfolio Visualizer does not allow money market funds, so I substituted a short-term Treasury fund. The following funds were set up for Portfolio Visualizer to consider. Vanguard Dividend Growth is currently closed to new investors. I don't care for Vanguard Dividend Appreciation as much because it is more volatile.

Name Symbol Return Std Dev Max. Drawdown
Vanguard Short-Term Treasury VFISX 2.2% 1.5% -1.5%
Vanguard Interm-Term Tx-Ex VWITX 3.7% 3.7% -5.2%
Vanguard LifeStrategy Income VASIX 4.1% 4.2% -15.5%
Vanguard Wellesley Income VWINX 6.3% 5.7% -18.8%
Vanguard Wellington VWELX 7.2% 9.2% -32.5%
Vanguard Dividend Growth VDIGX 8.6% 11.6% -38.0%

Efficient Frontier

A retiree can get higher returns if they are willing to accept more volatility by investing in the Vanguard Wellington (VWELX) or Dividend Growth (VDIGX). However, risk is higher as we are in the late stage of the business cycle.

Allocations

Name Symbol 85% VWINX

Max RTN @5% Vol

Max Sharpe Ratio
Vanguard Short-Term Treasury VFISX 15% 10% 35%
Vanguard Interm-Term Tx-Exempt VWITX 15% 35%
Vanguard Wellesley Income VWINX 85% 65% 25%
Vanguard Dividend Growth VDIGX 10% 5%

Portfolio Metrics

Metric 85% VWINX Max RTN @ 5% Vol Max Sharpe Ratio Wellesley
% Equities 29.9% 31.6% 13.4% 35.2%
Start Balance $1,000,000 $1,000,000 $1,000,000 $1,000,000
End Balance $1,205,177 $1,213,400 $904,872 $1,327,503

End Balance

(inf adj)

$912,878 $919,108 $685,408 $1,005,536
Return 1.3% 1.4% -0.7% 2.0%

Return

(inf adj)

-0.7% -0.6% -2.7% 0.4%
Stdev 4.9% 4.9% 2.7% 5.7%
Best Year 19.1% 14.3% 9.2% 16.1%
Max. Drawdown -15.1% -15.0% -4.5% -18.8%

Impact Of Bear Markets On Withdrawals

How much cash is enough? The appropriate allocation to cash for a retiree or someone nearing retirement depends upon their savings, guaranteed income such as pensions and social security, health, tolerance to risk and expenses among many other factors.

Two important factors to consider are the maximum drawdown that one is willing to accept and the length of time that it takes to recover. Below is a chart of both. Portfolios that have a higher concentration to equity had a maximum drawdown of 20% or more during the 2007/2009 bear market compared to the Maximum Sharpe Ratio Portfolio which had about 8% drawdown. The other point is that it took fully three years for all portfolios to return to previous levels; meanwhile retirees may need to continue to withdraw their living expenses.

Summary

These are some simple retirement portfolio strategies. I prefer to manage risk as described in "Low Risk Portfolios For 2019". In the late stage of the business cycle with trade disputes, high market volatility, and government shutdown, I choose to be slightly more conservative than the Vanguard Wellesley Fund, which is one of my core holdings.

Disclaimer: I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional.

Disclosure: I am/we are long VWINX, VWELX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.