Finding the best funds for retirement income is no easy task in a low-rate environment. Fortunately, it’s not difficult to find an ideal combination of high yields, low expenses and top-notch portfolio management at Vanguard funds.
In addition to finding decent yields, investing for retirement income is also challenging because retirees need investment returns that can match or outpace inflation.
Compounding the challenge to find the best funds to meet these needs is a fast-approaching rising-interest-rate environment, which will keep a lid on bond prices even as yields will be slow to rise.
All of these challenges underscore the need for low expenses and experienced fund managers, which can be found in the best Vanguard funds.
Knowing that retired investors have various needs for retirement income funds, we will highlight the best Vanguard funds from three different broad categories: 1) balanced funds, 2) bond funds and 3) sector funds.
Vanguard’s Best Funds for Retirement: Vanguard Wellesley Income (VWINX)
Expenses: 0.25%, or $25 annually per $10,000 invested
Minimum Investment:$3,000
Yield: 2.83%
Investors looking for a winning combination of income generation and inflation-beating returns will like what they see in Vanguard Wellesley Income (VWINX).
The VWINX portfolio has an asset allocation of roughly 37% stocks, 60% bonds and 3% cash. The stocks consist of mostly high-quality large-cap names like Wells Fargo (WFC), Microsoft (MSFT) and JPMorgan (JPM).
The fixed-income portion consists primarily of high-credit-quality, intermediate-term bonds, which makes for sturdier returns in risk-off markets but also trims back on the yield.
For example, the 10-year annualized return of 7.2% beats 99% of conservative allocation funds, but investors looking for high yield might want more than the current yield of 2.83% for VWINX.
Therefore VWINX can make a solid core holding for a retirement income portfolio. The investor can then add satellite holdings to suit their investment objectives.
Vanguard’s Best Funds for Retirement: Vanguard High-Yield Corporate (VWEHX)
Expenses: 0.23%
Minimum Investment:$3,000
Yield: 5.9%
Investors wanting to add a high-bond fund to their retirement income portfolio will want to check out Vanguard High-Yield Corporate (VWEHX).
In addition to high yields, VWEHX shareholders get an experienced management team and deep analytical resources from Wellington Management Company.
Lead manager Michael L. Hong has been at the helm of VWEHX for over seven years but has been with Wellington for 18 years. Returns during Hong’s tenure have averaged at least in the top third of high-yield category peers.
Prospective buyers of VWEHX should use caution with high-yield bond funds because they can go through short-term periods of stock-like volatility. Therefore long-term holding periods should be planned.
For example, VWEHX fell 21.3% in 2008, then rebounded 39.1% in 2009. But the 10-year annualized return for VWEHX is 6.5%.
Vanguard’s Best Funds for Retirement : Vanguard Utilities Index (VUIAX)
Expenses: 0.12%
Minimum Investment:$100,000
Yield: 3.69%
Investors with large portfolios needing a high-yield stock fund can consider Vanguard Utilities Index (VUIAX).
Fortunately, for those investors with less than $100,000 to clear the minimum initial investment for VUIAX, there is an ETF available — Vanguard Utilities ETF (VPU) — with the same yield and same rock-bottom expense ratio.
Utilities stocks are well-known for their high yields and defensive qualities, which make utilities funds a smart choice for many investors looking for income in retirement.
Top holdings for VUIAX include high-quality large-cap utilities stocks like Duke Energy (DUK), NextEra Energy (NEE) and Dominion Resources (D).
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VWINX for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
