Model IRA Portfolios for Vanguard Investors

Recent research from Vanguard revealed a surprising finding: A lot of the money in IRAs—either the result of rollovers from company retirement plans or from direct directions—is sitting in cash instruments rather than being invested in stocks or bonds.

A sample of Vanguard accounts found that 28% of the accounts funded through rollovers in 2022 were still sitting in cash 12 months later; 55% of the accounts funded through direct contributions were sitting on ice after a year. And it’s not just a short-term phenomenon: The firm found that rollovers that sit in cash tend to stay that way for at least seven years. Vanguard noted that what it calls “the sticky IRA cash trap” tended to be particularly pronounced among younger savers, the very people who are most likely to benefit from long-term compounding.

It’s hard to generalize about investors’ motivations, but my guess is that some combination of inertia, forgetfulness, and analysis paralysis explains the finding. Like most major firms, Vanguard fields an array of options in the major asset classes, and it’s possible that some investors just don’t know where to start. Figuring out a reasonable asset allocation and the specific investments to use to populate it seems like too heavy of a lift.

Helping you get those assets invested in a reasonable way is the goal of this article. I’ve created some minimalist portfolios composed of Vanguard funds, as well as portfolios that blend the firm’s index and active funds, 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. All benefit from Vanguard’s cost edge: While the index-fund portfolios are ultracheap, even the portfolios that blend active and index funds have asset-weighted expense ratios that are much lower than similarly allocated portfolios with average expense ratios.

Note that these portfolios are geared toward tax-sheltered accounts like IRAs. As a result, they’re not constructed with an eye toward tax efficiency. I’ve also developed similar Vanguard portfolios for taxable accounts.

Vanguard IRA Portfolios for Retirees

Geared toward retirees, these portfolios all employ 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% to 32%), and the remainder in stocks. Meanwhile, retirees who are holding Roth IRAs earmarked for heirs (that is, that they don’t intend to spend actively from) may well want to employ an even larger equity position.

Three-Fund Retirement Bucket Portfolios for Vanguard Investors

For investors who want to keep their portfolios simple and call it a day, it’s hard to go wrong with a three-index-fund portfolio: a total US market index fund or exchange-traded fund, a total international stock fund or ETF, and a bond index fund/ETF. Bolt on cash to cover your ongoing cash flow needs—especially useful in a year like 2022, when both stocks and bonds lost money at the same time—and you’re good to go.

Investors could also use a total world market index like Vanguard Total World Stock (available as an index fund VTWAX or ETF VT) for their equity exposure. Right now, that fund is about 60% US/40% non-US, but at various points in time that could lead to a heavier non-US weighting (including the related foreign-currency fluctuations) than a US-based retiree may wish to hold.

Combination Index/Active Fund Retirement Bucket Portfolios for Vanguard Investors

These portfolios include more holdings—eight to nine positions apiece, including cash—than the minimalist portfolios above. The key advantage of having more discrete holdings focused on specific asset classes is that it lends itself to more rebalancing opportunities. In a banner year for the stocks at the top of the US market, for example, the retiree could trim Vanguard Total Stock Market while leaving the other positions alone. In addition, the portfolios all contain healthy positions in Vanguard Dividend Appreciation (VDADX/VIG), which has tended to have lower volatility than Vanguard Total Stock Market.

Vanguard IRA Portfolios for Retirement Savers

Because they’re geared toward people who are still saving and investing for retirement, these portfolios don’t include a cash component like the Bucket portfolios above do. Of course, retirement savers should hold some cash for emergencies, but they should generally hold those funds outside an IRA for tax- and penalty-free access. All of these portfolios lean on Morningstar’s Lifetime Allocation Indexes for their asset-class exposures.

Three-Fund Retirement Saver Portfolios for Vanguard Investors

These portfolios use the same three total market funds in the bucket (in-retirement) portfolios above. But a total world stock market index is especially appropriate for savers looking to further simplify the number of moving parts in a portfolio. Alternatively, one of the funds in Vanguard’s target-date series, Vanguard Target Retirement, would make an even lower-maintenance alternative, providing ongoing rebalancing and risk-reduction as retirement approaches. (More investors should use target-date funds in their IRAs!)

Combination Active/Index Retirement Portfolios for Vanguard Investors

Like the Bucket portfolios above, these portfolios include a blend of index and actively managed funds, but they tilt a bit more heavily toward active funds rated highly by Morningstar’s analyst team. The Aggressive portfolio includes just a small slice of a total bond market index fund, but the Moderate and Conservative portfolios scale up their bond allocations. Additionally, the Conservative portfolio’s bond allocation includes more-nuanced fixed-income exposure—namely, short-term bonds and Treasury Inflation-Protected Securities—than the Moderate portfolio.