Recent Retiree - Target Retirement Income or Wellesley Fund?

[aceofspades]

Recent retiree - 71 years old. Looking to roll over an IRA (350k) into a Vanguard IRA. Most likely, monthly withdrawals will not be much more than the RMD.

I'm interested in both the Target Retirement Income Fund (VTINX) and the Wellesley Income Fund Admiral Shares (VWIAX).

I cannot decide which fund is best. Some have suggested a mix of both funds.

My question is, should I stick with one of these funds or use both? If both, what would be the best ratio?

As always, if I am way off track here and should be considering different funds entirely, please advise.

Best,

aceofspades

[steve roy]

Both are considered "income funds," and have similar costs (17 basis points for Target Income; 18 basis points for Wellesley Admiral -- $50 grand minimum) but ...

Wellesley is actively managed with 60% of its portfolio in intermediate corporate bonds and 40% in stocks -- most value titled -- in its portfolio

Vanguard Target Income has a higher percentage of bonds (70%) and is far more diversified on both the equity and bond sides. Target is a fund of index funds ... with the exception of the managed TIPS fund.

Hope this helps.

[Sheepdog]

Consider both. I am a 79 year old retiree and have both. I am at 60% Wellesley and 40% Target Income plus a short term bond fund. That is not a recommendation for you, but just that that is my allocation. It fits my psyche and my overall allocation.

[livesoft]

I would bet that if you called up Vanguard and got one of those free financial plan thingies that the CFP that you talked to would never ever recommend Wellesley. Instead they would recommend sticking with index funds such as those found in Target Retirement Income.

[Sheepdog]

I would bet that if you called up Vanguard and got one of those free financial plan thingies that the CFP that you talked to would never ever recommend Wellesley. Instead they would recommend sticking with index funds such as those found in Target Retirement Income.

That has not been necessarily so. My Vanguard advisor did recommend both index and managed. The specific managed funds recommended at the time were Wellington and US Growth (booooo). I hope they don't recommend the latter now.

[joe8d]

Recent retiree - 71 years old. Looking to roll over an IRA (350k) into a Vanguard IRA. Most likely, monthly withdrawals will not be much more than the RMD.I'm interested in both the Target Retirement Income Fund (VTINX) and the Wellesley Income Fund Admiral Shares (VWIAX).

Why limit your choices to those 2 fund?.Recent retiree at age 71 implies max SS.You may want to consider a Life Strategy Moderate (60/40) or Life Strategy Conservative ( 40/60 ) and dilute down ,if desired,with separate bonds funds ( STIG and/or TIPS).
I'm 70 and have a 50/50 AA.

[mdpsychcrnp]

AceofSpades,

The first choice you have to make is exactly what your risk tolerance is. Second, you have to determine what your philosophy regarding active and passive management is. Bogle's essential hypothesis, which we all know to be true, is that COSTS matter. Indexing is a convenient means to reduce the costs incurred in a portfolio. After costs, it is rare to find an actively managed fund that can consistently beat an index fund over prolonged periods of time. What is less clear is when costs are equal or virtually equal. It is also clear that both the Wellington Fund and Wellesley have amazing track records for balanced funds. The only balanced fund that even comes close is the Fidelity Purtian Fund (FPURX), which, since inception (1947) has outperformed the Wellington Fund. Yet over the last ten years it has trailed Wellington, both with 60% stock/40% bond allocations (though they both seem to be free to allocate 5% each direction).

Wellesley is 37.43% stock, 61.04% bonds, and 1.53% cash reserves. Its stock portfolio is large cap value tilted, with particular emphasis on dividend yielding stocks, and its bond allocation is 100% investment grade corporate bonds. Expense ratio (ER) is 0.25% for Investor Shares, Admiral Shares is 0.18%.

Target Retirement Income is 44.9% Total Bond Market Index (70% government bonds/mortgage backed securities and 30% investment grade corporates), all with a duration of slightly less than intermediate term (the fund holds short term and long term bonds as well). It is 21.2% total stock market index, 19.9% TIPS, 9.1% Total International Stock Market Index, and 4.9% money market fund. So 64.8% bonds, 4.9% money market, and 30.3% stock. ER is 0.17%

Compare the two funds since Wellesley's inception in 1970.
http://tinyurl.com/cuffexd

The last decade creates some "tracking error" if you will due to having two bear markets, but what you see is that it, essentially, performs as well as the S&P 500 over time, missing out on the heights of bull markets. Of course, it could be argued that the time period between 1970 to 2012 is not long enough to be representative of this trend, but I don't believe it. This is not to say that the past is predictive of future performance, of course.
Now this chart compares the performance of the two since 2003:
http://tinyurl.com/cps6s3t

Given that VTINX has only been around since 2003 it's hard to judge what it's typical behavior will be in bear and bull markets as it has only seen one bear market, 2008. What you see, however, in terms of total returns is this:
Year VTINX VWIAX
Total Return 2007 8.17% 5.76%
2008 –10.93% –9.79%
2009 14.28% 16.14%
2010 9.39% 10.71%
2011 5.25% 9.74%

A more accurate comparision would actually be with VSCGX, which is the conservative growth fund in the Vanguard Life Strategy Series. It is 40.45% stocks and 59.54% bonds
http://tinyurl.com/d76pgfh

As you can see from the graph, Wellesley still outperforms.
Year VSCGX VWIAX
Total Return 2007 6.99% 5.76%
2008 –19.52% -9.79%
2009 17.06% 16.14%
2010 11.14% 10.71%
2011 1.76% 9.74%
From 2007-2011 the value of Wellesley is $13,128.65 and the value of VSCGX is $11,331.01. Wellesley is considerably less volatile and solely by its strategy in 2011 and in 2008 it produced less losses and thus more total return.

I certainly can't tell you what to do but I can tell you what is the plan for my wife and I. I'm only 30 at the moment but provided that I live to retirement age and I pre-decease her, her instructions are to move all of our holdings (I'm assuming by that point we will have exhausted our taxable portfolio and will only have the Roth's and TIRA's) into VWIAX and the Lifestrategy Income Fund (VASIX), 50% to 50%. I'm tempted to just tell her to use Wellesley exclusively. However I hopefully have at least another 30-40 years to see the performance of Wellesley to determine if that is a risk worth taking. I'm still very conscious of manager risk and the risks of asset bloat. Time will tell. Incidentally, should I pre-decease her before retirement age (and thus we have taxable holdings remaining and the complication of multiple accounts), her instructions are to move everything over to to Portfolio Solutions with Rick Ferri.

In conclusion, my suggestion for you is to combine VWIAX with VASIX or VTINX. That is, of course, if all of your holdings are exclusively in tax-deferred. If you have a good social security check coming in or a pension from a previous employer then VSCGX is probably a better option because you have the ability to take more risk. There is also a fair argument that if you are currently collecting social security, then the TIPS allocation in VTINX is less useful because you are already receiving an inflation adjustment with SS. The inflation adjustment may be more of a moot point, however, if the "fiscal cliff" talks go as they seem to be, with the current inflation adjustment based upon CPI being replaced with chained-CPI. Also, if you choose a higher equity allocation then it's arguable the the equity allocation effectively gives you inflation protection.

[Hexdump]

MD, thank you for this beautiful analysis. I am exactly at the point of trying to decide how to consolidate and simplify amongst the funds you discussed.
Again, thank you.

George

[aceofspades]

Thank you all.

I think I may just go with a 50/50 ratio b/w these two funds. What do ya'll think?

[bertilak]

mdpsychcrnp's analysis is good. I went through a similar analysis just recently. I had TWO accounts to deal with: My IRA and a trust account for my mother. Both accounts had been set up according to all the Boglehead principles, resulting in funds for bonds (TIPs and TBM), stocks (total US and total International) and REITs.

I decided that was all to complicated for my beneficiary, or anyone who has not been involved with this as much as I have.

My decision was to put all the IRA into Wellington and all the trust in Wellesely. I chose Wellington over Wellesely for the IRA since I currently do not draw from this account, living solely on pension and SS. I can take a little exrta volatility there. I did not worry about Wellesely in a taxable account since my mother is only in the 10% tax bracket.

Before doing this, my IRA's overall expense ratio was 0.12%. It is now 0.19%. The trust is similar, 0.12% -> 0.18%. I note that just about every discussion of why index funds out-perform active funds is heavily based on expense ratios and both the Ws have very low ERs. I look at that extra six or seven basis points as a super-cheap management fee, allowing my beneficiary to mostly ignore things.

[livesoft]

No analysis will help one select the better performing fund going forward. It just ain't gonna happen. There is a rule that whichever fund one chooses or even overweights, the other fund will do better. Thus it doesn't really matter which fund one chooses because the choice will be wrong.

Once one relaxes and realizes they will pick the wrong fund by definition, the choice is easy.

[sscritic]

No analysis will help one select the better performing fund going forward. It just ain't gonna happen. There is a rule that whichever fund one chooses or even overweights, the other fund will do better. Thus it doesn't really matter which fund one chooses because the choice will be wrong.

Once one relaxes and realizes they will pick the wrong fund by definition, the choice is easy.

Just remember the line you choose at the supermarket. You are always wrong, but you still get the groceries in the end.

P.S. I still can't relax. I am a known line racer. My niece laughs at me every time we are at Disneyland. I always pick out someone in the other line to race against. It makes the waiting less boring.

[Timcom99]

Thank you all.

I think I may just go with a 50/50 ratio b/w these two funds. What do ya'll think?

I like the 50% - 50% but if it were me I might look into the lifestrategy funds instead of Target Date funds. Lifestrategy Conservative Growth kind of mimics the Wellesley funds 60% Bonds and 40% Stocks mix. The Lifestrategy Conservative Growth has an ER of only 0.15%. It does not contain TIPS funds or Prime Money Market funds (Prime Money Market Is Paying Nothing) like Target Retirement has. Lifestrategy just uses 3 funds 1) Total Domestic 2) Total International 3) Total Bond. Just my 2 Cents.

[nedsaid]

Financial planner Jonathan Pond says that financial decisions do not have to be all or nothing decisions. I like that philosophy. It makes it easier to compromise with a spouse who might have different opinions than you.

In your case, you can do some of both. There is no final exam. No one will tell you on your deathbed which of the two options would have worked out the best. If you can't decide between the two options, do some of each.

It doesn't always work out this way of course, but sometimes when faced with two options the best answer is yes!! Would you like pumpkin pie or apple pie? Yes!!!

[aceofspades]

Is there an AA calculator online that will give me the exact AA if I divide my funds evenly between the Target Retirement Fund and the Wellesley Fund?

[Christine_NM]

Is there an AA calculator online that will give me the exact AA if I divide my funds evenly between the Target Retirement Fund and the Wellesley Fund?

If you have a Vanguard account, log in. Go to Portfolio Watch, then to Portfolio Tester, where you can see the effect of adding new funds or exchanging between funds before you buy.

[livesoft]

Is there an AA calculator online that will give me the exact AA if I divide my funds evenly between the Target Retirement Fund and the Wellesley Fund?

Please use Morningstar Instant X-ray and not Vanguard's portfolio watch. Or use both and report to us the difference.

[EternalOptimist]

I like 50/50 and if my math is right it's:

Stocks: 33.86%
Bonds: 62.91
Short term: 3.23

https://personal.vanguard.com/us/funds/ ... tingFrom=1

[maddyken]

Once transferred you should qualify for a free Vanguard Brokerage Account, you could then gain access to PAUIX which would be a great complement to Wellesley Income (Admiral shares). An even split between VWIAX and PAUIX would be great, although I'd probably tilt a bit toward PAUIX.

[bertilak]

Is there an AA calculator online that will give me the exact AA if I divide my funds evenly between the Target Retirement Fund and the Wellesley Fund?

Using Morningstar's Instant X-Ray tool I get the following:

6% Cash
26% US Stock
8% Intl Stock
61% Bonds

That's 34% equities.

Instant X-Ray tool can be found at: http://portfolio.morningstar.com/Rtport ... Entry.aspx.

[lks]

My IRA is 67% LifeStrategy Moderate Growth & 33% Tips because I don't like Target's Prime, which pays nothing, and low Tips to Tot. Bnd. allocation. I keep my Prime balance low and only to pay bills.

[mdpsychcrnp]

MD, thank you for this beautiful analysis. I am exactly at the point of trying to decide how to consolidate and simplify amongst the funds you discussed.
Again, thank you.

George

George:
You are most welcome. Was just running through scenarios myself (though it's long before I need to) and it just so happened the poster in question was asking the very question I had (hopefully) figured out the answer to, at least in my situation.

[aceofspades]

I am about to pull the trigger on this with a 50/50 allocation b/w the two funds; however, does anyone have any final thoughts?

Also, I am a bit nervous about this "fiscal cliff" talk. Might it be prudent to wait a couple weeks?? Sigh...

[livesoft]

You have my permission and blessing to pull the trigger. When you lose money, you can blame me because it would not bother me at all.

[EternalOptimist]

"He who hesitates is lost"

[pkcrafter]

I am about to pull the trigger on this with a 50/50 allocation b/w the two funds; however, does anyone have any final thoughts?

Also, I am a bit nervous about this "fiscal cliff" talk. Might it be prudent to wait a couple weeks?? Sigh...

Since you are a new poster, maybe we should cover a few things. First, the combination is pretty good from an equity standpoint because Wellesley will increase diversification in large value. But...

Wellesley is actively managed which means it is subject to risks index funds don't have. It only holds 62 stocks so it is sensitive to asset bloat, and the fact that it's very popular right now increases this risk. The bond portion is somewhat riskier than those in the TR fund, so you are getting a slight-moderate increase in quality risk and duration risk. As long as you are aware of these things you aren't likely to get surprises. Don't worry about the fiscal cliff, it isn't a cliff.

Paul

[Munir]

I am about to pull the trigger on this with a 50/50 allocation b/w the two funds; however, does anyone have any final thoughts?

Also, I am a bit nervous about this "fiscal cliff" talk. Might it be prudent to wait a couple weeks?? Sigh...

TR Income is safer but Wellesley will do better (with greater risk). Good decision to go 50:50. Their holdings do not duplicate each other too much. Stocks are large value & high dividends in W while TRI has mostly TSM. Fixed income is longer-term corporate bonds in W while TRI is TIPS and Total Bond Market which is loaded with US government instruments (70%).

[livesoft]

It should be too late to comment on this as the Ace should've submitted buy orders this afternoon.

[ddunca1944]

We are also recently retired (starting our 5th year in retirement). We have both (Wellesley and Target retirement) I like the income from Wellesley (and I trust the fund managers to make good deisions re the bond allcation). But I also like the broader diversification of thevTarget Retirement fund, so we have both. The best of both worlds.

[Hexdump]

I am in the process of consolidating all our funds into Wellesley. Well, we never had more than 4 funds to begin with and Wellesley accounted for about 50% of the total anyway.
it was going to be that or 50/50 Wellesley and Life Strategy Income.
I put together a simple spreadsheet to see what would have happened had I invested various amounts in Wellesley, 10 years ago, reinvesting the dividends and cap gains and withdrawing $7,500.00 each quarter.
If my spreadsheet is accurate, a $550,000 investment would fund retirement and never run out, even during the "fun" days of 2009.

Having only one fund makes it easier for the Frau to manage things.

[bertilak]

Having only one fund makes it easier for the Frau to manage things.

This is exactly what I did a few weeks ago and for the same reason. (Well OK, I kept my 5% REIT allocation)

I realized my multi-fund portfolio, although easy for me to understand, would be too much to ask someone else to understand and manage -- someone who was not intimately involved with setting it up, someone who never heard of Vanguard, Bogle, Bernstein, Malkiel, Ferri or Swedroe, just to name the obvious ones. Heck, there are probably some right here on bogleheads.org who would say I myself have an inadequate grasp of things! (See 5% REITs.)

But I guess I did OK (and stayed the course for at least a year) since everything I sold had a long-term capital gain.

[brisni]

I helped my retired mother invest an inheritance a few months ago, and after some analysis came to the conclusion of going 50/50 between TR Income and Wellesley. As much as I love index funds, it is hard to argue against the track record of Wellesely. This was for a taxable account. The dividends go into Prime MM, and I set up a monthly stream from there to her checking account.

- Brian