It’s 2022 now and you’re 60 years old. Firstly – a hearty congratulations to you on reaching such an important milestone. You’ve worked hard and surely you are now looking forward to enjoying your golden years. At this point, most of the financial planning is about one key life stage: retirement. Which Vanguard funds would be right for you at this stage? The answer, perhaps not surprisingly, is that “it depends”.
In this guide, I have reviewed a handful of the best funds available through Vanguard for 60-year-olds, while considering what you may wish to look for in the perfect strategy. There are several factors those on the verge of retirement must consider and further below in this article I have elaborated on a few of these.
Investing can be a great way to grow your money and fund your retirement, but it can also be daunting if you’re not sure where to start. I’ve done my best to simplify the topic for you. However if you find all of this overwhelming, please do consider consulting a licensed finance professional as they can help you craft a solution that is customized for your specific needs.
Is ready-made the way?
Before we jump in to discussing the funds, its important to consider how much time and effort you want to expend on managing your portfolio. Also how much knowledge can you bring to the table and do you the fortitude to take the right decisions when the market is in a correction?
If at this stage of your life you do not want to take on the hassle of managing the intricacies and minutiae of your portfolio, using a ready-made portfolio is a safe option. Vanguard has designed several ‘Target Retirement’ funds with year projections attached for when you may wish to withdraw – and these are typically split between equity/stocks and bonds. Instead of manually choosing the stocks you’d like to invest in, Vanguard will do the hard work for you – and you can simply pick a package that’s proven to build income over time.
Aside from Vanguard, Nutmeg also offers a highly automated solution towards investing. I have written an article comparing the Nutmeg and Vanguard platforms, which you may find useful.
If your taste for risk is a little spicier, there’s no harm in leaning towards building your own portfolio. Retirees may still wish to reserve a little money and a safety net to ensure they still have money to look forward to – but you could opt for a build-your-own portfolio that gives you more flexibility, and a greater chance of you making a large income on the back of it.
At 60, your attitude to risk will likely swing one of two ways – you’ll either want to protect your retirement fund while enjoying a little more income, or you’ll want to go all-in – nothing ventured, nothing gained. Thankfully, Vanguard provides options that swing either way – but with fantastic track records.
Best Vanguard Funds for 60-year-olds
If you’re a few years away from retirement and want to make passive money in the back of your savings – or are keen to try your luck on the stock market – Vanguard has a few interesting setups to ensure you get the security of bonds, while sampling exciting growth through equity and shares. Let’s take a look at the best options for a 60-year old from Vanguard in the UK.
Target Retirement 2025 Fund
The Target Retirement series of funds are one of the easiest ways in which you can invest your retirement portfolio. Pick a retirement target date, put your money in the fund, and let the experts at Vanguard do the hard work for you for a very minimal fee of 0.24% of assets.
This fund currently has a relatively conservative asset allocation of 56% in equity and 44% in bonds. Vanguard says the fund is suitable for investors that are planning to retire in or within approximately five years after 2025. So if you are 60 years old now and plan to retire in the next 5 years, this would be a great fund to pick.
As the 2025 date draws closer, the funds allocation will gradually shift towards a 50-50 split. As this incremental shift to bonds continues with time, it is important to note that the fund’s ability to grow its assets will be increasingly constrained. For example, the 2020 portfolio now has 44% in equity and the 2015 fund has only 31% in equity. If continued growth of your assets is important to you (say if you want to pass on the portfolio to your children), then this fund may not be the right one for you.
The fund’s assets are primarily invested in low-cost Vanguard index funds and ETFs which invest in stocks and bonds of companies in developed economies. Due to the continually changing asset allocation in the fund, it does not make sense to look at the historical returns of this fund.
Although Vanguard classifies this fund as a risk level of 4 (out of 7), in the broader context, this fund is still a relatively low risk fund. The only other funds with lower volatility risk would be purely bond or money market funds. However, such funds would also come with minimal returns.
There is a £500 minimum investment threshold and the ongoing charge (OCF) for this fund is 0.24%. The fund operates under the UCITS structure, which is good to note. Also note that this fund reinvests its dividend to grow the overall assets over time. You will therefore have to sell down units of the fund to generate your own income.
The Target 2025 fund is appropriate for investors who:
- want a portfolio on auto-pilot due to having low knowledge or lack of time to conduct their own research;
- fit in the Conservative asset allocation category by virtue of time horizon and/or risk tolerance;
- do not necessarily require growth of the invested capital.
How to Obtain a Higher Return
If you like the Target Retirement series for their auto-pilot feature, but at the same time you do not want an overly conservative portfolio just yet, you could consider investing in the Target 2030 fund which has 63% in equity; or for the more aggressive, the 2035 fund, which has 68% in equity.
Note that higher equity levels bring in higher volatility, so it is important to account for this appropriately in your planning.
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LifeStrategy 60% Equity Fund
Unlike the Target Retirement 2025 fund which has a continually shifting allocation from equity to bonds, this fund has a constant 60% allocation to equity and 40% to bonds. This 60/40 allocation is the gold standard for “Balanced” portfolios. The greater equity component allows the portfolio to grow over time, whereas the 40% bond allocation provides some downside protection during volatile periods and also generates the periodic coupon required for income. So how good is this fund? Let’s dive further and review this Vanguard 60/40 fund.
The fund’s assets are primarily invested in low-cost Vanguard index funds and ETFs which invest in stocks and bonds of companies in developed economies. Vanguard classifies this fund as a risk level 4 out of 7.
In the recent interest rate hiking cycle and corresponding market correction, balanced portfolios have struggled to deliver returns as both bonds and stocks have dropped in value at the same time. There may still be some pain to go as central banks continue to act aggressively to tame inflation. This means that funds with a higher bond allocation may not deliver the protection from volatility that they are supposed to. It’s a painful situation, but not unexpected as rates had nowhere to go but up from their 0% levels.
Over the last 5 years, this fund has delivered an annualized return of 5.14% as of July 2022. Over 10 years, this was 7.46%. This performance looks a little weak mainly because the returns over the last 12 months has not been great – the fund lost 3.29% of its value. If however one jumps back to this same point in time last year, the 5 year annualized return was a respectable 7.81% and 10 year return was 8.45%.
Looking ahead one year, it’s likely that the fund performance will start to stabilize as central banks will most likely reduce the pace of hiking from that point onwards. The other silver lining is that higher interest rates also translate to juicier yields on the bonds which should lead to a higher dividend yield for the fund.
There is a £500 minimum investment threshold and the OCF on this fund is 0.22%. The fund operates under the UCITS structure, which is good to note. This fund is offered in both the Accumulation and Income variety. The dividend yield on the Income version is only 1.4% currently and paid annually. Look for this number to grow over time as rates increase.
The Lifestrategy 60% equity fund is appropriate for investors who:
- want to grow their portfolio value over time;
- can tolerate some portfolio volatility;
- would classify themselves as “Moderate” or “Balanced” in their outlook;
- are willing to put in just a little bit of effort to monitor their portfolio allocation over the years and modify it when needed (typically on annual basis).
This portfolio is suited for the semi-DIY investor as you still do not need to put in much work – maybe a couple of hours per year is sufficient!
How to Obtain Higher Return
If you wish to increase the equity allocation to get higher growth from your portfolio (at the cost of increased volatility), you could jump up to the LifeStrategy 80% Equity fund, however this would likely put you in the Aggressive bucket at this life stage.
If you opt for a middle route, you could target a 70% equity allocation. However as there is no readymade fund for that, you would have to do it manually. To reach a 70% target equity allocation, I recommend the following approach – for each £100,000 that you have, buy:
- £75,000 of the LifeStrategy 60% Equity Fund
- £25,000 of the Lifestrategy 100% Equity Fund
This approach would likely require a couple of hours per quarter to manage as you may want to do some research to figure out which fund would be appropriate to sell down to generate any income that you may require.
How to Obtain Lower Volatility
In order to reduce portfolio volatility (at the cost of lower returns), you may want to go more conservative. You could do this by opting for the LifeStrategy 40% equity fund. In my mind this is a very conservative allocation and may only suit those 60 year olds who are very risk averse or may have a big cash requirement coming up in the next few years. As stated earlier, a conservative allocation will not allow the total value of the portfolio to grow much over time.
A middle of the road approach would be to target a 50% target equity allocation. You could do that by following this approach: For each £100,000 that you have, buy:
- £83,000 of the LifeStrategy 40% Equity Fund
- £17,000 of the LifeStrategy 100% Equity Fund
Again this semi-DIY approach requires a little more time, however it is entirely doable.
Cheapest Way to Invest in Vanguard ETFs?
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Other Important Considerations
Don’t Forget Your Old Pensions
You have most likely changed your jobs multiple times over the course of your career and it’s likely that you have pension funds accruing to you at potentially each one of those employers. It’s easy to forget these and lose out on a big chunk of your money! Services like PensionBee or Nutmeg help you track down your old pensions and consolidate them all in one place.
Although at 60 it may look like time is flying by quickly, it is important to remember that there is still a long life ahead! The average life expectancy in the UK is now 81 years, so at 60 you’re likely still looking at another 21 years of life ahead – a very long time!
It’s therefore important to plan carefully. If you go too conservative in your investment allocation now, there is a real risk of running out of your money too quickly.
What’s most important – growth or income?
The growth vs income debate in my mind is misplaced. From a purely financial perspective, one should opt for a portfolio that maximizes total return, which is inclusive of capital gains and dividends, while minimizing risk. In simple terms, what this means is that your portfolio should be allocated in such a way that you are not concerned about whether your returns are coming from dividends or stock prices going up – you just want the best returns overall.
In fact, since capital gains are typically taxed at a lower rate, it is more tax efficient to “generate your income” by selling down units of the fund that have gained in value rather than to receive an equivalent amount in dividends. If your portfolio has grown by 6% in value, you can sell down 4% of the portfolio to generate your own income, and meanwhile still have the portfolio grow by 2% in value.
Note that other than the fully DIY approach in which you would pick funds that have a distinction between growth and income, for the Target Retirement and LifeStrategy series of funds, this is a moot point as Vanguard handles all of the hard work for you. Since the dividend yield on those funds is in the 1 to 2% range, you still would need to sell 2 to 3% of your portfolio annually to meet your total income requirements.
Don’t take risk lightly
At 60, as you draw closer to retirement, your ability to recover from financial mistakes is greatly diminished. It is therefore very important to not take undue financial risks with your capital. Please do consider your abilities and knowledge before investing your hard-earned money in any fund – even if it has the Vanguard label.
Investment stability around your 60s is a must. That’s not to say you should avoid funds that swing towards any kind of risk, but it’s worth putting your money behind a fund or ETF that gives you the best of both worlds. Thankfully, technology and access to funds such as Vanguard’s fantastic selection have evolved hugely over the decades – but consider that you may not have decades to bounce back from poor decision-making.
When in doubt, always consult a licensed professional.
Setting The Correct Asset Allocation
We discussed which funds you might want to consider, but how do you know which asset allocation is the right for you? If you haven’t already done so, it is important to pause and examine your current life situation and determine the correct asset allocation for you. I presented a simple asset allocation framework earlier, from which it’s worth discussing a few points via example. Let’s pick 3 hypothetical people and look at their situations
Note: If you’re reading this article on a mobile phone, the table below will be easier to read while holding the phone horizontally.
|Health||A few small issues, but nothing major||Recently had a hip replacement surgery and has some chronic health conditions||In good health|
|Dependents||None. Adult children are independent||One adult child who is dependent on Peter for care||Two children in university and due to graduate next year.|
|Current Annual Income||£50,000||£60,000||£150,000|
|Pre-Tax Income Needed in Retirement||£35,000||£40,000||£100,000|
|Annual Pension Income (Expected)||£15,000||£20,000||£0|
|Planned Retirement Age||61||61||65|
|Investment Knowledge||Some knowledge||Low||High|
|Time Horizon||25 years||15 years||30 years|
|Fixed Assets||None||Fully paid off home|
|Fully paid off home|
|Total Personal Investment Funds||£850,000||£550,000||£2,000,000|
As you can see in this example, although all three are of the same age, they have vastly differing circumstances and must therefore proceed with different investment and asset allocation strategies.
Based these individual situations, here’s what I think would be appropriate for our three examples:
- Joanne: Joanne appears to be in a reasonable situation for her retirement. Based on the 4% rule, she has enough money saved up. She has some knowledge of investing and may have the time to do her research, so she can take on some of the investment research herself. Finally, as she can tolerate some volatility, has no dependents, and is in good health, we can categorize her in to the “Balanced” approach.
Joanne would be a good candidate for the LifeStrategy 60% Equity Fund.
- Peter: Peter’s situation is much tougher as his health condition is poor and he also an adult child who is dependent on Peter for care. Additionally, while Peter does have higher pension income than Joanne, his needs are also greater while his portfolio value is much lower. Given Peter’s low knowledge and low risk tolerance, and shorter investment time horizon, we will categorize him in the “Conservative” category. He is likely best served by a platform that does all the heavy lifting for him or by going to an investment advisor.
Peter would likely find it easiest to put his money in the Target Retirement 2025 fund. Peter will likely also need to generate some additional income in his retirement, which could be generated through a reverse mortgage or rent by taking on a roommate. Alternatively, he could consider delaying his retirement by several years to reduce the draw on his portfolio, while also letting it build up some more through additional contributions and market growth.
- Nicole: Nicole has a high income and wealth level. It’s important to note that despite her large portfolio, based on the 4% rule, she still does not have enough saved up to meet her needs. She needs at least £2.5 million to fund her income expectation of £100,000, so she needs to grow her portfolio. Otherwise, she is in good health, plans to work for a couple of years more so her children can graduate. Due to her good knowledge and risk-taking ability, we can classify her as “Aggressive”.
Nicole could either pursue a fully DIY approach and pick the individual funds she likes or she could opt to go for the LifeStrategy 80% Equity fund.
How Much Money Do I Need to Retire?
The answer really depends on your specific situation – what type of lifestyle do you expect to live? Do you have any major financial obligations? Is your house fully paid off or do you live still owe money on it? Or do you rent your home?
A simple rule of thumb that many people seem to agree on is to use the 4% rule: In one year you can extract 4% from your portfolio without impairing its long-term value. For example, if you want to receive an annual pre-tax cashflow of £50,000 from your portfolio and you expect to receive £20,000 annually from your pension, then you would need to generate another £30,000 from your investment portfolio. Based on the 4% rule, you should ideally have at least £750,000 in your personal retirement funds.
Why is 4% the magic number? This is based on a few important historical statistics and assumptions: a balanced portfolio (60% in equities and 40% in bonds) can be expected to generate at least 4% annually over a long period of time. For example, we discussed above how Vanguard’s LifeStrategy 60% Equity Fund easily clears this hurdle. This fund would have let you draw down 4% from your portfolio while still having it grow.
The 4% rule also allows for some margin of safety related to inflation and poor market conditions. Note however that during periods of extreme market stress, if you have the option, it would make sense to reduce your withdrawals from the portfolio to ensure that you do not hammer the overall portfolio too much when it is down.
The table below shows how much money you would need at the different withdrawal rates shown.
Note: If you’re reading this article on a mobile phone, this table will be easier to read while holding the phone horizontally.
|Annual Pre-Tax |
|@ 3%||@ 4%||@ 5%|
If you do not intend to bequeath your portfolio upon your death, you can consider drawing down your entire portfolio over the next 20 to 30 years. In this case, you could try using the 5% threshold. With this 5% rule, to generate £30,000 of pre-tax cashflow annually, you can get away with having only £600,000 in your personal retirement funds. This strategy is always riskier as you may potentially end up out-living your savings. Alternatively, a several year stretch of poor financial market conditions may mean that you end up drawing too much from your portfolio when it is down. You may need to be flexible with this approach and avoid drawing too much from your portfolio when it is down, to ensure that your funds do not get exhausted pre-maturely.
The reverse approach – drawing down 3% – would be useful where you intend to leave behind a growing portfolio. Note that this approach only realistically works where you have significant other supplemental income, such as through your pension, or that you have a very large portfolio value.
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How can Vanguard help me?
The funds I’ve listed in this article are geared towards investors aged 60+ who are looking forward to a peaceful retirement. Vanguard’s portfolios are carefully designed with multiple demographics in mind, and you can also rely on their managed allocation options if you want to go fully hands-off.
You have the reassurance that Vanguard has not only been in the game for decades, but that they are fully backed by the FSCS. This means you’re never likely to see your money disappear and be left with zero to retire on – you’re always guaranteed a level of protection.
I like Vanguard for its fantastic portfolio templates – while other investment platforms lead with AI and robo-advisors as the current trend in simple trading, I genuinely think pre-retirees stand to benefit more from human-curated setups that are tried and tested. The fact Vanguard lets you start investing for retirement decades ahead of time (with a pre-calculated template) definitely helps to make your life easier!
Of course, there are plenty of platforms and choices out there – and not every 60 year old investor is exactly the same. What do you want out of your money? Do you want to build an estate or reserve for your next of kin?
The funds I’ve picked from Vanguard should give you a good step up into growing money into your retirement – but, as always, follow advice from the professionals, too!