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By Jason Stipp | 09-08-2010 10:16 AM

Three Key Ingredients for Retiree Portfolios

Set aside some liquid assets, add a spoonful of inflation protection, and kick it up with a dose of stocks.

Jason Stipp: I'm Jason Stipp for Morningstar.

Morningstar's Christine Benz, director of personal finance, last year put together three model portfolios for retirees: one for conservative, one for moderate and one for aggressive investors.

She is checking in on those portfolios again this year, and she is here today to tell us a little bit about some of the key concepts that she learned as she was pulling these together. Christine, thanks for joining me.

Christine Benz: Jason, nice to here.

Stipp: So among the key themes, among the key ingredients that might be a part of all of these portfolios, the first one is one that really, a lot of folks aren't talking about today, and that's inflation.

And a lot of people aren't talking about it because it's been very mild recently; a lot of folks maybe expect some deflation. But this is something that you must keep on your radar as a retiree.

Benz: Right, and it seems like even macro people who are thinking about long-term deflation/inflation trends are acknowledging that inflation should be on everyone's radar. And the key reason it's so important for retirees is that as they are steering an ever-larger share of their portfolios into safe, oftentimes fixed rate assets, inflation is going to gobble up a sizable share of those payments that you might receive from your portfolio.

So it's that much more important to add a measure of inflation protection to your portfolio.

Stipp: So, when you are thinking in percentage terms, obviously maybe that would grow as you get a little bit older, but what are some general targets for investors in retirement to think about the portion of their portfolio that should be in inflation protection?

Benz: Well, I look to Ibbotson Associates, which is a Morningstar company that focuses on asset allocation, for guidance on topics like this. And so, Ibbotson is typically recommending a stake in Treasury Inflation Protected Securities as a percentage of a fixed-income portfolio being in the range of 25% or 30% of that bond portfolio.

I think that's a good, useful rule of thumb and probably a higher TIPS sleeve than the typical investor makes room for. And also, the Ibbotson allocations call for 5% or 6% in commodities to add another measure of inflation protection, a different kind of measure of inflation protection, to that portfolio.

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