IRA Portfolios for Minimalists

Many investors are in permanent procrastination mode when it comes to their IRAs. According to research from Vanguard, investors frequently rush in their contributions before the mid-April deadline each year, even though they could have made their contributions a full 15 months earlier. And even after they’ve made a contribution, they often tarry to get the money invested in long-term assets, leaving their funds in cash.

Vanguard calls this the “procrastination penalty,” because those delays can result in lower ending balances than would be the case if investors contributed and invested as soon as they possibly could.

Part of the reason investors might delay getting the funds invested is that they’re not sure what to invest in. Unlike 401(k) menus, which typically feature an edited list of investments, IRA investors have an enormous, perhaps even overwhelming, array of choices. The path of least resistance—doing nothing and leaving the funds in cash until another day—beckons.

A simple, low-maintenance option for IRA investors is a low-cost target-date fund that matches the investor’s anticipated retirement date. Alternatively, a minimalist portfolio composed of three inexpensive index funds—plus a bit of cash for retired people—can be a solid way to go, too. Three-index-fund portfolios provide exposure to all of the key market sectors in a single low-cost package. The costs of owning such portfolios keep going down, too.

I’ve created some minimalist portfolios composed of three Fidelity or three Vanguard index funds in varying allocations for a variety of life stages. The in-retirement portfolios are all organized on the Bucket portfolio framework, while the portfolios for retirement savers are geared toward still-working people who have a long runway to retirement.

Note that these portfolios are intended for tax-sheltered accounts like IRAs. As a result, they’re not constructed with an eye toward tax efficiency. I’ve developed similar Vanguard and Fidelity portfolios for taxable accounts; these portfolios are designed to minimize the drag of taxes on an ongoing basis. (You can find the Fidelity tax-efficient Bucket (retiree) portfolios here, and the Fidelity tax-efficient Retirement Saver portfolios are here.)

3-Fund IRA Portfolios for Retirees

Geared toward retirees, these portfolios all employ index funds and use a bucket structure, meaning that the retiree uses anticipated portfolio withdrawals to determine how much to hold in cash, bonds, and stocks. A retiree planning to spend 4% a year from an IRA, for example, might hold two years’ worth of those planned withdrawals in cash (8% of the total portfolio), another five to eight years’ worth of withdrawals in high-quality bonds (20%–32%), and the remainder in stocks. Retirees who are holding Roth IRAs earmarked for heirs (that is, IRAs from which they don’t intend to spend actively) may well want to employ an even larger equity position. This article discusses how to customize your portfolio’s asset allocation based on your own situation.

The portfolios all include a total US market index fund, a total international stock index fund, and a bond index fund. Each of the portfolios also includes a cash bucket to cover ongoing cash flow needs. In the interest of simplicity, they’re missing a few asset types that I like to see in retiree portfolios, such as Treasury Inflation-Protected Securities and short-term bonds. But they’ve got the basics covered.

Fidelity Three-Fund IRA Portfolios for Retirees

Vanguard Three-Fund IRA Portfolios for Retirees

3-Fund IRA Portfolios for Retirement Savers

Geared toward people who are still working and saving for retirement, these portfolios vary in their amounts of stock exposure and, in turn, their risk levels. Unlike the above portfolios, they don’t include cash because the assumption is that the still-working investor isn’t actively spending from their assets yet. Such individuals should hold cash as an emergency buffer, but they’ll want to hold it outside an IRA to avoid the taxes and penalties that apply to early IRA withdrawals.

The Aggressive Portfolio is best suited to younger investors with many years until retirement, whereas the Conservative portfolio is geared toward still-working individuals who expect to retire within the next few years. The Moderate portfolio falls between the two. The allocations are loosely based on Morningstar’s Lifetime Allocation Indexes.

Investors should bear in mind their risk tolerances as well as their proximity to retirement when selecting an allocation mix. Young investors who are risk-averse and haven’t yet lived through a major equity downdraft may prefer to use the Moderate portfolio. Meanwhile, older investors who know they can handle some volatility and will be able to rely on a pension for most of their living expenses could reasonably use the Moderate or even the Aggressive portfolio, even if retirement is close at hand.

Fidelity Three-Fund Portfolios for Retirement Savers

Vanguard Three-Fund Portfolios for Retirement Savers