There’s a ways to go, but we’re still aiming to retire within the next 10 years. As such, I’ve been thinking about what happens when we want to live off of withdrawals from our retirement portfolio. According to the passively-managed Target Date funds by Vanguard, if you reach retirement you’re directed to the Vanguard Target Retirement Income fund. Another popular option for retirees is the Vanguard Wellesley Income Fund, which has been around for over 40 years, and is actively-managed by Wellington Management Company, an advisory company that has been around since the Great Depression. Let’s take a quick look to see how these two funds compare.
Vanguard Target Retirement Income Fund (VTINX)
This fund seeks to provide “current income and some capital appreciation”. The approximate asset allocation is 30% stocks, 65% bonds, and 5% cash. It is a fund of funds, holding the Vanguard Total Bond Market II Index Fund, Vanguard Total Stock Market Index Fund, Vanguard Inflation-Protected Securities Fund, Vanguard Prime Money Market Fund, and Vanguard Total International Stock Index Fund. Here is the current asset allocation per Vanguard as well as the equity and bond style boxes from Morningstar.
Number of stocks held: 9,958 (3,323 US + 6,635 Foreign)
Number of bonds held: 4,486 (4,450 nominal bond + 36 TIPS bonds)
Expense ratio: 0.17% ($170 a year on a $100,000 balance)
Vanguard Wellesley Income Fund Admiral Shares (VWIAX)
This is an income-oriented balanced fund, which is another way of saying the same thing as above. The approximate asset allocation is 35% stocks, 65% bonds. I am choosing the Admiral shares as opposed to the Investor shares because the great majority of people using this for their retirement will reach the $50,000 minimum balance. Here is the current asset allocation per Vanguard as well as the equity and bond style boxes from Morningstar.
Number of stocks held: 60
Number of bonds held: 559
Expense ratio: 0.21% ($210 a year on a $100,000 balance)
The overall asset allocation of the two funds is very similar, especially since you could consider cash/short-term reserves as bonds. However, how they are constructed is very different. Target Retirement is passively indexed on a market-cap weighted distribution and holds nearly 10,000 stocks from around the world. Wellesley is actively-managed to include only 60 selected dividend stocks from primarily large, US companies.
As for bonds, Target Retirement follows another market-weighted index of the Barclays Capital U.S. Aggregate Float Adjusted Bond Index. There is a large chunk of US Treasury, US Treasury Inflation-linked, and US Agency mortage-backed bonds. Wellesley is mostly in corporate investment-grade bonds.
Wellesley is produces more of it’s returns as income through stock dividends and the higher bond yields from corporate bonds, with a current SEC yield of 3.28%. This allows the psychological benefit of possibly spending only the dividends that the fund distributes every quarter. However, there is the concern that 60 stocks is not enough diversification, or that their bond analysts might drop the ball. Here is the growth chart of $10,000 (click to enlarge):
At least historically, the managers of Wellesley have added value. Will it continue? Unknown. The good news is that with such low costs, there’s one less reason to expect underperformance in the future. These are just an example of what is out there, although on some early retirement forums I see folks simply holding a 50/50 split of these two exact funds. Sometimes I think everyone should just start with these kind of low volatility funds in the first place, and just reinvest dividends.