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By Jason Stipp and Christine Benz | 08-21-2014 02:00 PM

Benz: 7 Fund Favorites for the More Aggressive Retiree

Retired investors with a stomach for more risk might consider easing into these funds, says Morningstar's Christine Benz.

Note: This video is being re-featured as part of Morningstar's October 2014 5 Keys to Retirement Investing special report. This video originally appeared in August 2014.

Jason Stipp: I'm Jason Stipp for Morningstar. Last week, our director of personal finance, Christine Benz, offered some of her favorite funds for more conservative retired investors. But what about those who want to take a somewhat more aggressive stance? She has a few ideas for you as well, and she is here to share those today.

Christine, thanks for joining me.

Christine Benz: Jason, it's great to be here.

Stipp: First of all, when might an investor entering retirement want to take a more aggressive stance? What are some potential reasons for that?

Benz: I think it's really important to make sure that you're not mixing up risk tolerance with risk capacity. So, you might feel like you have a high risk tolerance, you feel like you can handle more volatility and risk, but you want to be sure that you can literally handle that volatility and risk as well. So, if you lose money with some of your aggressive holdings that it won't force you to change your standard of living or change your spending habits.

People with higher risk capacities might have a lot of income coming in the door during retirement from nonportfolio sources. They might have, for example, a pension that is supplying a lot of their income. They really don't need to use their portfolio very aggressively. They don't need to spend it down very aggressively. They can afford to take more risk with their portfolio. So, I think you want to make sure that you are distinguishing between risk tolerance and risk capacity.

It's also true for people who are younger retirees--people who are, say, 60 when they retire. They absolutely do need to have a higher-risk portfolio because they need that portfolio to last them a longer period of time than the person who is retiring in their late 60s. So, it's important to make sure that you have those concepts straight in your mind.

Stipp: What if I feel like I haven't saved enough for retirement? Is that a reason for me to be more aggressive in my portfolio?

Benz: Possibly a little bit. I think that you can tweak around the margins. What you don't want to do is be dramatically more aggressive. So, if you're looking at a lot of target allocations for people in your age band and they're pointing to maybe having a 50% equity/50% bond portfolio, you absolutely don't want to shift 80% into equities. That's going to leave you with a too aggressive portfolio. But you definitely want to look at your own spending situation and use that to help drive the asset allocation of the portfolio.

Stipp: You've often talked about the bucket approach. We talked about it when we discussed more conservative picks. If I want to take a more aggressive stance, would my buckets look different?

Benz: Possibly. The size of the buckets may look a little bit different for more aggressive retirees than would be the case for conservative retirees. In my standard bucket strategy, I talk about using bucket one to house two years' worth of living expenses. If you're more aggressive, you might think about having that be just one year's worth of living expenses.

The same would go for bucket two. In the construct where I've done model portfolios, I've usually thought about maybe a seven-year bucket two--so, enough money in there to tide you through seven more years' worth of living expenses. In the case of more aggressive retirees, maybe they could think about having just five years in that bucket two. And then, of course, the remainder of the portfolio would be the longest-term portion and that would go in bucket three.

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