Advice: The 9 Best Vanguard Funds for Retirees

Advice: The 9 Best Vanguard Funds for Retirees

If you are retired or about to retire and want a relatively simple, inexpensive investment that won’t lead you astray, then your search should start with Vanguard mutual funds.

Let me be clear: this article is not a sales pitch. I do not work for Vanguard and I have no affiliation with the company except as a shareholder in their funds.

Read: To Invest Rich, The Power Of Time Beats A Lucky Stock Pick

Why Vanguard?

With over $7 trillion under management, Vanguard is the only mutual fund with a financial structure built to benefit shareholders in its mutual funds.

The company’s funds are known for low costs and lower tax exposure that comes from low sales. It goes without saying that Vanguard funds are untaxed funds. No sales commission, no sales pressure.

From Vanguard’s range of excellent funds, here are nine I like for retirees.

Vanguard Short Term Investment Grade Fund
VFSUX,
-0.20%

This is the first fund my wife and I invest in every year. In January, we make our annual withdrawal from long-term investments to cover our expenses for the coming year. We also keep our emergency money in this fund.

Because this fund holds no stocks, our finances are remarkably unemotional. Whatever happens in the stock market at any given time, we know it won’t affect us until the next calendar year. If you’ve never tried to manage your money this way, I recommend it.

You won’t get rich with this fund, but you’ll probably make nearly 100 times as much as you would in a typical bank account that pays (this is really disgusting!) 0.01% interest.

Over the past 15 years, this fund has increased in value by 3.27%.

Read: It’s Never Too Late for a Happy Retirement

Balanced funds: boring beautiful

Balanced funds hold both stocks and bonds. Over the years, their shareholders are statistically likely to have above-average success as investors.

Why is that? Not because the funds themselves have magic. It’s because the combination of growth and stability makes you more than happy to leave your money where it is, rather than trying to figure out when to buy and when to sell.

None of the following eight balanced funds are designed to normally hold much more than about 60% in stocks. That means they probably won’t suffer the kind of big losses from equity funds.

Any of these can make a good single-fund portfolio for a retiree. But don’t pick at random; the differences are important.

Vanguard Target Retirement 2015
VTXVX

If you are already retired, this fund is ready for you. With an equity stake of only about 35% and the diversification of (indirect) holdings of over 10,000 stocks and 24,000 bonds, you can’t go wrong. You get some growth plus a good degree of stability.

If you like the target date concept, but want a little more equity exposure, it’s easy to pick a variation that focuses on a later year, such as 2020 or 2025.

Vanguard LifeStrategy Funds

These funds of funds come in various combinations of equity exposure, from 20% to 80%, although I’m excluding the most aggressive from this discussion. By the way, all bonds in these funds are investment grade. No mess.

LifeStrategy Income Fund
VASIX,
-0.62%
typically has only about 20% of its portfolio in equity funds, the rest in bonds, perhaps suitable for investors with ample resources (in other words, more than they think they will ever need) and those who are very shy about the stock market.

LifeStrategy Conservative Growth
VSCGX,
-0.77%
doubling that equity stake to about 40%, perhaps the right choice for conservative retirees who want some growth but don’t want to go very far to get it.

Life Strategy Moderate Growth
VSMGX,
-0.93%
is very similar, but with a 60/40 split of stocks and bonds. This allows for more growth, albeit without much excitement.

Two funds for retirees who don’t know much about investing

Many times over the past 20 years I have recommended Vanguard Wellesley Income Fund
VWIAX,
-0.70%
and/or Vanguard Wellington Fund
VWENX,
-0.91%.

For conservative retirees I don’t know well, Wellesley has become what I consider my best advice.

Wellesley has been taking good care of investors since 1970. The portfolio normally consists of 40% equities and 60% bonds. This is an actively managed, low-cost fund, with approximately 70 large-cap stocks (mostly value stocks) and approximately 1,300 bonds.

For those less conservative, Wellington is my go-to suggestion, especially for those who value a very long track record.

Wellington has been in business since 1929 and was the industry’s first-ever balanced fund.

Wellington’s typical 60/40 split of stocks and bonds reflects the way the managers of many large pension funds invest. They know that they need reliable long-term growth and that their portfolios must be able to pay their retirees under all circumstances.

Wellington is actively managed, with approximately 60 large-cap stocks and approximately 1,100 bonds.

Note: My wife and I prefer an overall 50/50 allocation of stocks and bonds. If that appeals to you, you can achieve it by splitting your money equally between Wellesley and Wellington.

Two other Vanguard balanced funds are worth considering.

Vanguard Balanced Index Fund
VBIAX,
-0.88%
is index-driven and has approximately 60% of its portfolio in 3,300 US primarily growth-oriented stocks and the remainder in approximately 10,700 bonds.

Vanguard Tax-Managed Balanced Fund
vtmfx,
-0.82%
manages to minimize capital gains distributions and other taxable income, with a typical stock/bond split closer to 50/50. If you like that allotment along with lower tax bills, this fund could be for you.

Returns and Risks

As you can see in the table below, risk and return levels are indeed linked, but not always exactly what you would expect.

Funds are listed in order of their 15-year rolling compound annual growth rate (as of early October). For each, you’ll also see performance in 2008, the worst calendar year for investors in a long time.

Table 1: Vanguard Funds Compared

Fund

15 year return

2008

Wellington

8.7%

-22.2%

Balanced Index

8.33%

-22.1%

Balanced tax management

7.51%

-18.32%

Wellesley Income

7.26%

-9.79%

Life Strategy Moderate

6.65%

-26.5%

Target Pension 2015*

5.99%

-24.1%

LifeStrategy Conservative

5.69%

-19.52%

LifeStrategy Income

4.73%

-10.53%

Short-term investment rate

3.27%

-4.65%

*Statistics for this fund reflect a period when the fund had a more aggressive allocation than it is today.

To learn more about these funds (plus four stock funds), watch a video presentation I made last year, “My 12 Favorite Vanguard Funds for Retirees.”

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