My columns featuring a sample portfolio for retirees using the so-called bucket system have elicited many terrific comments. Some readers characterized the bucket approach as old wine in a new bottle, and I'd agree that there's an element of truth to that assertion. After all, most bucketed portfolios will include cash, bond and stock components--not a radical departure from the types of portfolios many retirees have maintained all along.
Yet other readers noted that they find the bucket system a useful construct as they think about crafting their in-retirement portfolios. Because the bucket approach segments a portfolio based on when a retiree expects to tap his or her assets for living expenses, it helps take the guesswork out of asset allocation. And having safe reserves on hand to meet income needs also allows retirees to ride out the volatility that's inherent in the longer-term, higher-risk/higher-reward portion of the portfolio.
Some readers requested a similar portfolio using only exchange-traded funds rather than the traditional mutual funds that populate my other portfolios. ETFs aren't just for fast-trading institutions and individual day-traders; they can also be ideal building blocks for retiree portfolios. For one thing, any broad-based index product, including ETFs, has set-it-and-forget-it appeal. The ability to be hands-off is particularly attractive for retirees who have better things to do with their time than monitor manager comings and goings or worry that their fund manager was leaning one way and the market another. Moreover, many (but not all) ETFs and broad-market index funds feature ultralow costs, and that's a particularly desirable retirement-portfolio attribute because your return potential trends down as you shift more and more assets into bonds and cash. Finally, broad-market equity ETFs' tax efficiency is attractive given that many retirees have a healthy share of their assets in taxable accounts. (Bear in mind that fixed-income ETFs will be no more tax-efficient than mutual funds, however.)
Let the bucketing begin
There's no such thing as a one-size-fits-all portfolio, so as with other versions, I've made some assumptions about the retirees for whom my sample ETF portfolio is appropriate. My assumptions include the following:
- The portfolio is geared toward a couple with $1.5 million in assets. (It can readily be customized to suit investors with larger or smaller asset pools, however, assuming the initial withdrawal rate is reasonable.)
- Their time horizon is 25 years, and they have a very high risk capacity.
- They plan to withdraw 4% of their initial balance in year 1 of retirement ($60,000), then inflation-adjust that amount every year.
- The portfolio assumes the assets are held within a tax-sheltered account, so the after-tax withdrawal amount would be lower than $60,000. Those with large shares of their portfolios within taxable accounts will need to pay greater attention to tax efficiency, especially with the fixed-income portion of the portfolio.
- The retirees will take a strategic approach to their portfolio management (that is, long-term and hands-off) rather than employ a more tactical strategy. They will regularly move assets from buckets 3 to 2 and 2 to 1, a process that will make the overall portfolio more conservative over time.
Bucket 1: Years 1 and 2
- $120,000: Cash (guaranteed investment certificates, money market accounts, and so on)
This component of the portfolio is in place to meet near-term income needs; it emphasizes stability above income production and provides limited growth potential. True cash--GICs, money market funds, and so forth--is in place to meet income needs in years 1 and 2 of retirement. Investors who are comfortable with modest fluctuations in their principal values might consider breaking the assets in bucket 1 into two components--true cash and a slightly higher-yielding alternative like iShares DEX Short Term Bond Index XSB.
Bucket 2: Years 3-10
- $100,000: iShares DEX Short Term Bond Index XSB
- $200,000: BMO Aggregate Bond Index ETF ZAG
- $100,000: iShares DEX Real Return Bond Index XRB
- $80,000: Vanguard FTSE Canadian High Dividend Yield ETF VDY
Income from this portion of the portfolio will spill into bucket 1. (Assets in bucket 3 will also move into bucket 2 over time.) Its focus is income production, stability and inflation protection, with a secondary goal of capital appreciation. I've used the BMO Aggregate Bond Index ETF to serve as the core intermediate-term fixed-income position, but those who prefer a heavy emphasis on government bonds could stick with an all-government bond index tracker such as iShares DEX All Government Bond Index XGB . I have also included a stake in short-term bonds and in a real return bond fund for explicit inflation protection. In contrast with my traditional mutual fund bucket portfolio, which included a slice of a conservative balanced fund, Steadyhand Income 
, this one takes a smaller stake in a pure equity fund, Vanguard FTSE Canadian High Dividend Yield ETF.
Bucket 3: Years 11-25
- $350,000: Vanguard FTSE Canadian High Dividend Yield ETF VDY
- $200,000: Vanguard MSCI US Broad Mkt ETF (CAD-hdg) VUS
- $200,000: iShares MSCI EAFE Index C$-Hedged XIN
- $50,000: iShares U.S. High Yield Bond Index C$-Hedged XHY
- $25,000: BMO Emerging Market Bond Hedged CAD Index ETF ZEF
- $75,000: iShares Broad Commodity (CAD-Hedged) CBR
The growth engine of the portfolio, bucket 3 stakes the lion's share of assets in low-cost, broadly diversified equity index ETFs. It obtains a quality bias with its largest equity position, Vanguard FTSE Canadian High Dividend Yield ETF, which focuses on sturdy Canadian companies that have good track records of paying dividends, but it also includes exposure to broad-market U.S. and international stock index trackers.
The ETF bucket portfolio includes some aggressive fixed-income exposure. I think there's good reason to favour active management in the junk-bond space, as Morningstar analyst Samuel Lee outlined in this article, and my strong preference is for investors to obtain exposure to higher-risk bond market sectors via a free-ranging multi-sector product such as PH&N High Yield Bond . In lieu of that offering, this portfolio obtains higher-risk, potentially higher-reward bond exposure via a position in a junk-bond ETF and a small position in developing-markets debt. This portfolio also obtains additional inflation protection via a commodity-tracking ETF.
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