5 Retirement Portfolio Makeovers
During Morningstar.com's Portfolio Makeover Week, Christine Benz helped investors assess allocations, check their progress, target holes and overlap, and upgrade their holdings.
If you can count the number of investments in your retirement portfolio...on 10 hands. If you just got married, just got serious about investing, or just got close to retirement. If you're worried about your portfolio's sustainability or withdrawal rate...
...You just might need a portfolio makeover.
During Morningstar.com's 2014 Portfolio Makeover Week (June 2-6), our director of personal finance, Christine Benz, helped investors facing these and other dilemmas fit all the pieces together.
For each makeover, she sized up existing holdings and presented a possible new lineup of investments for those in similar situations. Along the way, she offered practical ideas on allocation, asset location, streamlining, and other upgrades.
Note: Names and other potentially identifying details in the following makeovers have been changed to protect the investors' anonymity. Makeovers are not intended to be individualized investment advice, but rather to illustrate possible portfolio strategies that all investors should consider in the full context of their own financial situations.
Monday, June 2 | Pat and Judy: Still Working at 69, But for How Long?
Fearing that he and his wife Judy got a late start in saving for their retirement, Pat, 69, is still working. That has allowed him to continue to save in his company retirement plan, delay tapping his and Judy's nest egg, and defer filing for Social Security, thereby boosting his benefit when he does retire.
But Pat would like to retire within the next few years so he can spend time with the family and volunteer with his church. Before he pulls the trigger on retirement, he wants a second set of eyes on his portfolio's sustainability as well as its asset allocation and specific investment positioning.
The majority of the couple's assets are in Pat's 401(k), and he's taken advantage of some fine actively managed funds. But their expenses are high and Pat doesn't earn a match, raising the question of whether rolling over those assets to an IRA might be a good idea. And while the couple's hefty cash stake provides some peace of mind, it's not without opportunity costs--namely, the likelihood that that part of their portfolio won't out-earn the rate of inflation.
Tuesday, June 3 | Don and Brenda: Mid-50s and in the Home Stretch
At 57 and 55 years old, respectively, Don and Brenda have put their two children through college and are looking forward to Don's retirement in seven years. Don, a computer engineer, and Brenda, a stay-at-home mom, have been assiduous savers, and their portfolio currently holds about $2.1 million in assets.
But even though they're in good shape in most key respects, they'd like feedback on a few key issues. First and foremost, they'd like to determine whether their current portfolio and savings rate can support their anticipated spending needs when they eventually retire (about $9,000 a month given that they live in a high-cost urban center near their children, whom the couple is also helping as they embark on their careers).
Second, they'd like another set of eyes on their asset allocation, investment choices, and asset location (which types of investments they hold in which accounts). As it is now, they have more than 70 holdings in Don's 401(k), a rollover IRA, Roth IRAs in both of their names, and various taxable accounts. Is there a way to reduce this sprawling portfolio without sacrificing diversification?
Wednesday, June 4 | Sandra: 'First-Generation' 401(k) Investor Navigates Retirement
"I have all the typical issues of the 'first' generation of retirees depending on a 401(k) and not a pension," wrote Sandra, now 73 and already retired. An avid Morningstar.com user, Sandra says she's worked to educate herself about investing, and has some ideas about how her investment program could be better. But she needs confirmation that she's on the right track. "I lack confidence, and I have been very slow to make the changes I need to make."
Specifically, Sandra fears she's holding too much cash and too little in equities. And with multiple accounts at multiple institutions, she'd like ideas for "portfolio cleanup," in her words. Because she's in drawdown mode and must take required minimum distributions from her IRAs and 401(k)s, Sandra is also looking for guidance on asset location and sequencing her withdrawals.
Thursday, June 5 | Karen and Gary: How to Relish the Now While Planning for Retirement
Karen and Gary were dealt a huge blow last year, when Gary, now 67, was diagnosed with a late-stage cancer. Gary is retired, but Karen, in her early 50s, is still earning a good salary as an accountant. Because of Gary's health, she'd like to step down from her high-pressure, highly paid job to spend time with him and do some of the things they wanted to do when they both retired, such as traveling around the U.S. She hopes to return to the workforce eventually but plans to move into a lower-paying, more rewarding position when she does.
Karen wrote seeking ideas on how they should position their portfolio. Not only do they want to carve out some funds for travel and other splurges in the near term, but Karen also wants to make sure that their portfolio is positioned for long-term growth and longevity. Whereas Gary's Social Security and two pensions supply much of this couple's living expenses currently, his pensions have no survivor benefits. That means their portfolio will be Karen's sole support--along with Social Security--if Gary predeceases her, so it must be built to last.
Friday, June 6 | Matt and Jenny: A Young Power Couple's Kickstart Portfolio
"HELP!!!" was the subject line in Matt and Jenny's request for a portfolio makeover.
In their mid-30s, this couple would seem to have everything going for them, including robust salaries as a medical doctor (Jenny) and as an attorney (Matt). But they've amassed little in savings thus far because they've been concentrating on paying down student loan burdens that were, to quote Jenny, "massive." They also have some big expensive goals, including buying a home, saving for college for the children they hope to have, and retiring with comfortable incomes in their 60s.
Now that their salaries are ramping up and they're ready to get serious about saving, they'd like help figuring the best use of their household's financial capital--the right investment wrappers (401(k)s, IRAs, and 529s, for example) as well as the best investments to put within them. "Neither of us is business-savvy," wrote Jenny.