Three Key Ingredients for Retiree Portfolios

Stipp: And inflation also is an important thing to keep in mind as you are thinking about other types of financial instruments that you might be using in retirement, including long-term care and also potentially for annuities.

How should I think about factoring in inflation as one of those important pieces for those products?

Benz: Well, if you are shopping for annuities, I would certainly enquire about whether you can buy inflation-protected annuities; there are some products in the market, and also for long-term care insurance. To me it's an absolute must that you do buy those additional riders that will give your benefits the ability to step up as health-care and long-term care costs step up.

Stipp: And certainly, we've seen a lot of inflation in that area more so than in some other areas.

Another important ingredient for retiree investors to think about, and maybe one that they don't always think about, is the long-term needs of their portfolio, because retirement is just a few year prospect, obviously. Knock on wood: It's a 20-year or maybe even a 30-year prospect. How should I think about that long time horizon?

Benz: That's the good news. We're all living longer, but that does mean that your portfolio really needs to last. And certainly, that is in part a function of the current low interest rate environment where you just can't get that longevity potential by sticking strictly with fixed rate assets right now. You need the growth potential that only stocks can afford.

And of course, if you look at stocks over the past decade it's not a particularly compelling proposition, but I do think that even retirees need stocks, and they might need a significant measure of stocks.

And they don't just need blue chip stocks, although I think that's an excellent starting point and an excellent anchor; I think they also want to think about a dose of international and maybe even a dose of small caps.

Stipp: So, obviously, very important to have a portion of your portfolios that's set up for that longer-term growth potential, but what about that part of the portfolio that I need right now, that part that I'm going to be drawing down from in the immediate future?

Benz: So, I think that's where the concept of creating that cash position to meet short-term needs is absolutely essential, Jason. So my portfolios don't include a dedicated cash component because it is individualized and that's going to vary as a percentage of your portfolio depending on who you are, and what you have, and what you're doing.

So, I did not include cash, a dedicated cash allocation in the portfolios. But it is very important to think about your near-term living expenses, and typically I tell retirees to keep anywhere from two to five years worth of living expenses in true cash, given how low cash yields are, you probably want to keep it on the low end of that range, and maybe invest the additional assets in say, a high-quality short-term bond fund or maybe even intermediate-term bond fund.

Stipp: Certainly, a lot of ingredients would go into your retirement portfolio, but three key ones; adjusting for inflation, making sure that you have some long-term growth potential in there, and making sure that you have that immediate liquidity--sounds like three primary ingredients for success.

Thanks for joining me, Christine.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.