The Best Vanguard Funds for Retirees

a fountain pen on top of a growth investment chart
••• DNY59/Getty Images

Some of the best Vanguard funds to buy are outstanding choices for retired investors. Yes, there are dozens of funds at Vanguard that are great choices for saving for retirement. But are those still the best funds once investors actually reach retirement?

Although many retirees can still be considered long-term investors, it is wise that they begin to invest for the short- and intermediate-term needs, in addition to long-term growth. For example, even though you may be in your sixties, you may live another 20 or 30 years. Therefore, you'll still need to invest for growth. However, once you're retired, your investment objective is likely to shift more toward income and preservation, with growth being an important but lesser priority.

Best Vanguard Funds for Retirement: Dividend Funds

Vanguard Investments are a mutual fund company that offers some of the best low-cost, no-load mutual funds available to investors today and they have some of the best dividend funds that can be ideal for retirement income.

Dividend mutual funds, which are often categorized with value stock funds, tend to be less aggressive (less risky) than other types of funds, such as growth stock mutual funds. This also makes them appropriate for retired investors, who typically don't want to buy shares of riskier funds, such as aggressive growth stock mutual funds. Dividends can be received as a source of income, or they can be used to buy more shares of the mutual fund. Most retired investors who buy dividend mutual funds are usually looking for a source of income, which is to say that they are looking for steady and reliable payments from their mutual fund investment.

Here are some of the best Vanguard funds for dividends:

  • Vanguard Dividend Growth (VDIGX) is an outstanding choice for investors who are looking for reasonable dividends now but want to see the dividend payouts (the yields) grow over time. The fund primarily focuses its holdings in U.S. large-cap value stocks with about 10 percent of the portfolio allocated to foreign stocks. The expense ratio for VDIGX is a low 0.32 percent, and the minimum initial purchase is $3,000.
  • Vanguard High Dividend Index (VHDYX) is ideal for investors looking for income now with high yields for stocks. The portfolio consists primarily of large-cap value stocks of companies in the United States that pay high dividends compared to similar companies. The expense ratio for VHDYX is a rock-bottom 0.18 percent and the minimum initial purchase is $3,000.
  • Vanguard Utilities Index Adm (VUIAX) focuses on stocks in the utility sector, which is highly sought for its high dividends. The portfolio holdings consist of large-cap U.S. stocks of utility companies, such as Duke Energy Corporation (DUK) and Southern Co (SO). The expense ratio for VUIAX is an attractively low 0.18 percent. However, this mutual fund is only offered in Vanguard's "Admiral" share class, which has a minimum initial purchase of $10,000.

Investors should keep in mind that, although dividend mutual funds may pay high yields for current income, there is always principal risk involved with these investment securities.

Best Vanguard Funds for Retirement: Conservative Allocation Funds

The very nature of conservative investing is aligned with smart retirement investing: In most cases, the overall strategy involves keeping market risk low and to keep volatility to a minimum while still achieving average returns that can match or slightly outpace inflation, which averages about 3 percent in the long run.

Retired investors may want to use conservative allocation funds, which usually hold a relatively low-risk blend of stocks, bonds, and cash in just one fund. This way retired investors won't see big declines during bear markets, and they can get a diversified allocation in just one mutual fund. Here are some of the best conservative funds from Vanguard:

  • Vanguard LifeStrategy Conservative Growth (VSCGX): The asset allocation for this fund is approximately 40 percent stocks and 60 percent bonds. This allows for slow but steady growth over the long term, which makes for a good conservative fund. VSCGX has been able to average over 4 percent annualized return over the long term. The expense ratio is cheap at 0.15 percent, and the minimum initial investment is $3,000.
  • Vanguard Wellesley Income (VWINX): The portfolio is solidly conservative with an allocation that ranges between 35 and 40 percent stocks, around 60 percent bonds, and the remainder in around 5 percent cash. As for performance, Wellesley beats at least 90 percent of other conservative allocation funds for 3-, 5- and 10-year returns. For one of the best conservative mutual funds you can buy, it’s hard to beat the cheap expense ratio of 0.25 percent. The minimum initial investment is $3,000.
  • Vanguard Wellington (VWELX): The asset allocation for VWELX is not quite as conservative as VSCGX and VWINX but its moderate allocation of approximately 65 percent stocks and 35 percent bonds can be suitable for conservative investors willing to take a bit more risk in exchange for higher long-term returns. Although Wellington is a medium-risk allocated fund, it still beat most 100 percent stock allocations in the challenging market period between the years 2000 and 2015, when the fund had an average return of 7.5 percent, compared to 4.5 percent for the S&P 500 Index. Like other Vanguard funds, you'll get a low expense ratio (0.26 percent) for Wellington. The minimum initial investment is $3,000.

    Best Vanguard Funds for Retirement: Bond Index Funds

    Low expense ratios are especially crucial for gaining a performance edge in the world of bond funds, and Vanguard has the best selection of low-cost bond funds in the mutual fund universe.

    For example, in some market environments, just a one percent difference in returns can separate the best bond funds from the worst, and many of Vanguard's index bond funds are between 0.50 to 1.00 percent lower in expenses than the average bond fund.

    Vanguard's passively-managed funds naturally have lower expenses than actively managed funds because the operating expenses are much lower for index funds (i.e. costs for research, analysis, buying and selling holdings is much lower for passively-managed funds). An index fund manager only needs to track the underlying benchmark index, whereas the active manager is usually attempting to beat the benchmark, which takes much more time and money. For bond funds, the primary benchmark is the Barclays Aggregate Bond Index, which is a broad bond index covering most U.S. traded bonds and some foreign bonds traded in the U.S.

    Using index funds can also be an advantage because the passive management removes the risk of the fund manager making human mistakes, such as miscalculating economic conditions like the direction of interest rates. Here are some of the best bond index funds at Vanguard that can be smart for retired investors:

    • Vanguard Total Bond Market Index (VBMFX): With an expense ratio of just 0.20 percent, investors get a big cut in costs compared to most bond funds and the lower expenses translate into better returns, especially in the long run. VBMFX tracks the Barclays Aggregate Bond Index. For periods of 10 years or more, investors can expect to meet or beat the returns of the average bond fund.
    • Vanguard Intermediate-Term Investment Grade (VFICX): Although VFICX isn't an index fund, it's expense ratio is still a low 0.20 percent. And although the active management style doesn't always keep it ahead of the benchmark index, the long-term returns have averaged better than index funds like VBMFX.
    • Vanguard Short-Term Investment-Grade (VFSTX): Short-term bonds typically have lower yields and lower returns, compared to intermediate- and long-term bonds but short-term bonds aren't as interest-rate sensitive, which makes them good choices when interest rates are rising. By now, if you don't already know, you may be wondering what "investment grade" means. Bonds are rated by their credit-worthiness. Depending upon the rating agency, the ratings are from AAA (highest quality) to D (in default). Investment grade is a middle ground, which typically ranges from AAA down to BBB-. An example of an AAA-rated bond is a U.S. Treasury bond. In translation, investment-grade bond funds invest in an average of medium quality bonds. The advantage for investors is that yields and long-term returns can be higher, especially in the long run, at least compared to other short-term bond funds like VFSTX.

      All three of the above Vanguard funds have a minimum initial investment of $3,000. A few other outstanding mutual fund choices for investors in retirement are their stock index funds like Vanguard Total Stock Market Index (VTSMX), and one of the best S&P 500 Index Funds, Vanguard 500 Index (VFINX). These are low-cost stock mutual funds that provide broad exposure to hundreds of U.S. stocks, all in one mutual fund.

      The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.