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By Jason Stipp and Christine Benz | 08-14-2014 04:00 PM

Benz: 5 Fund Picks for Conservative Retirees

Retired investors can tilt their portfolios to the safer side with these funds, says Morningstar’s Christine Benz.

Note: This video is being re-featured as part of Morningstar's November 2014 Risk Management Week special report. This video originally appeared in August 2014.

Jason Stipp: I'm Jason Stipp for Morningstar. Investors approaching or in retirement will naturally want to play it a little bit safer with their portfolios, especially after the volatility of the last 10 to 15 years in the market.

Here to offer some of her favorite ideas for more conservative retirees is Christine Benz, our director of personal finance. Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: So, investors will want to play it safer as they get closer to retirement, but maybe not too safe. There can be some risks to being too conservative.

Benz: Right. The best way to make your portfolio more conservative is to make an adjustment to your asset allocation. But you don't want to go overboard with that because when you look at what cash and high-quality bonds are yielding today, together it's hard to see how those two can out-earn the inflation rate. If you have a long time horizon for your retirement--so you expect to be retired for 15 or 20 years or even more--you can't afford to have so much staked in very safe securities. You need to nudge out on the risk spectrum, and you need to hold stocks in that portfolio.

Stipp: So, because of the need for short-term cash for living expenses but also longer-term investments because retirement could be a longer-term prospect, you often use or recommend what's called a bucket approach and these picks will align with that approach. Before we get to them, though, can you explain just the basics of the bucket approach?

Benz: I will. Harold Evensky is the originator of the bucket concept and, basically, it's a way to segment your portfolio for retirement based on your anticipated income needs. So, Evensky's key idea is that you have near-term cash needs set aside to cover those living expenses as they occur, which can allow you to withstand a little bit of volatility in the longer-term parts of your portfolio.

So, it's basically just a segmentation by time horizon. And I think it helps retirees see that "Well, if I'm not expecting to need the riskier parts of my portfolio until many years from now, I can afford to take some volatility there and earn some higher returns in the process."

Stipp: Playing it safe and using a bucket approach, obviously, doesn't mean that you're not holding stocks. You will be holding stocks--

Benz: Yes.

Stipp: --but you can tilt each of those buckets to be a little bit more conservative if you so desire. Let's start with bucket one; those would be the assets for your near-term needs. How would you play it safer there?

Benz: Here, I think that you don't want to take any risk at all. So, this is money that you'll use over the next one to two years of your retirement. When you look at the yields on shorter-term bonds right now--some sort of a shorter-term bond fund--they are hardly higher than what you can earn on just holding your money in true-cash instruments.

So, in a bank savings account, checking and savings accounts, money market account, money market mutual fund, you really are not getting paid to take on that little bit of interest-rate sensitivity. So, for conservative investors, I say for near-term expenses play it very safe; stick with true-cash instruments.

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