Lessons From Portfolio Makeover Week

Susan Dziubinski: Hi, I'm Susan Dziubinski. Morningstar director of personal finance Christine Benz just put the finishing touches on the content of our annual Portfolio Makeover Week. Christine is here to share some of the key lessons from the week that we can all learn from.

Christine, thanks for joining us today.

Christine Benz: Susan, it's my pleasure.

Dziubinski: Now your first lesson is for people to think about getting help planning for their retirement. Do we all need financial advisors?

Benz: Well, possibly. One thing I would say is when I looked through the submissions, and we got a lot this year, many of them were from people who were just getting ready to retire. So, they're trying to figure out, do I have enough? If when I embark upon retirement, I'm looking at my portfolio, how much can I withdraw from it each year? Really hard questions. And I do think that because retirement decumulation is inherently more complicated than accumulating assets for retirement, it is a good spot to stop and get some help.

What I would say though, Susan, is that not everyone needs ongoing portfolio handholding. So don't assume that if you have an advisor who you're using to help with your retirement plan that you necessarily need to sign on for an ongoing engagement. You might just get maybe a one-time check on your plan, and then maybe checks every couple of years, as you go along. You might not need that ongoing handholding. So, I leave it to each of our viewers to decide how much help they need. But it's definitely helpful, especially at this life stage to seek out the help of a tax-savvy financial advisor.

Dziubinski: Now, you noticed that a number of people who had submitted portfolios said that they were planning to delay their retirement, which--there's nothing wrong with that. But you suggest that people have a backup plan. Why is that?

Benz: Well, I love to hear that. And I will say, for example, one of the couples who I profiled, he was 80, she was 70. They had really enjoyed working, they work together actually, and they were just now getting fully retired. So, we're seeing this more and more I think in our lives, too. And there's a lot to be said from the standpoint of finances when it comes to delaying retirement. The thing I come back to, though, is what Mark Miller says, Morningstar contributor Mark Miller says, which is that delaying retirement is a worthy aspiration, but it's not a plan.

And to sort of accentuate that fact, I would point to some research from our colleague David Blanchett, who's Morningstar Investment Management's head of Retirement Research. And David's research has shown that people oftentimes don't retire at the point in their lives when they expected to. So oftentimes, people who expected to delay are forced to retire earlier than they expected. It might be their own health considerations. It might be spouse’s or parents’ health considerations. It might be that they were maybe forced out of that higher-paying job sooner than they expected to. So, I think it's always worthwhile to lay a backup plan. If your plan is to extend out your working years, put in place a plan for what you would do in case you couldn't keep working.

Dziubinski: Now, Portfolio Makeover Week is usually about, sort of the investments in the portfolio. But you can't deny the importance of Social Security and sort of the equation of retirees. So, can you talk a little bit about how impactful delaying Social Security can be, and what you found with the makeovers.

Benz: It's huge. And so, you know, we'll run through sort of various scenarios using portfolios with different asset allocations, and different withdrawal rates, and changes that we can make at the portfolio level. But some of the changes that you can make with Social Security delay date, if you're willing to extend that a little bit can be just so much more impactful. So, an example I would give from the Portfolio Makeover Week is that one of the people was a 60-year-old woman, and she was sort of toying with retiring at full retirement age claiming Social Security benefits at what Social Security calls her full retirement age. So, like 67 versus waiting all the way until age 70. And what she found was that the differential was like between $2,500 a month and $3,200 a month, so a $700 a month differential for delaying. And it's just impossible to make that kind of gain in a portfolio value with changes.

Dziubinski: With some tweaks.

Benz: Right, right. So, it's just one of the biggest-ticket changes that you can make to a plan. The thing I would say is that delaying Social Security doesn't necessarily mean delaying retirement. So, it may be that someone retires, pulls from their say, Traditional IRA assets first, and then delays Social Security and is able to claim that benefit later. So, there are a lot of moving parts here. But it doesn't necessarily mean that delaying Social Security means a later retirement date, part-time work can also figure into the mix.

Dziubinski: Now, it always pays to be sober about market return expectations. But you noted in the in the makeovers that that's especially true for pre-retirees and retirees. Why is it so important for that cohort?

Benz: Well, because that the first say 10 years of retirement is a really important time in retirement, and you want to make sure that you're not drawing too much from your portfolio, or expecting too much from your portfolio during those early years. So, when I was plugging in return assumptions for people who are getting ready to retire, I was using very muted return expectations, in part because of the current market environment that we're in. So, we have very low bond yields, currently. We have not-cheap equity valuations, although I've been singing that same song for a couple of years now, and things really haven't changed, things have continued to be really quite good. But nonetheless, I think it is probably just prudent when you're thinking about the next 10 years to be mindful that market returns might not be that great. You definitely don't want to extrapolate from the past 10 years for the next 10, because we rarely see things work out that way.

What I would say, though, Susan, for folks who have longer time horizons who aren't so concerned about near-term retirement, but maybe they're planning to retire in 50 years or 40 years, or something like that, well there I say if you have an equity-heavy portfolio, go ahead and use long-term market return assumptions, maybe 8% or so for the equity market. Because I do think over long periods of time, it's the best we have to go on. And you probably don't want to give your return expectation that much of a haircut if you have a really long time horizon.

Dziubinski: And speaking of people, investors who have longer time horizons, you had a few makeovers this past week that focused on older folks who are either entering retirement or nearing retirement, but you did have a couple of younger portfolio makeovers this year. And for those, there's an emphasis on remembering to balance the short term and the long term. Can you talk a little bit about that?

Benz: Yeah, it's really interesting to me. One was a younger individual not yet married, the other was married couple, three young children. And so what really struck me in looking at their plans was, yes, they needed to prioritize retirement funding because they can take advantage of compounding, all those things we hear about, the advantage of getting started early on your retirement fund. But they were also balancing here-and-now considerations and in both of their cases, what I saw is, in my view, they're pretty underfunded in terms of their emergency fund. So, I think a little multitasking is in order. Both were trying to purchase homes in fairly high, expensive property markets. So that was another challenge.

So, one thing that I would say is kind of a tip for people who are trying to balance the long term and the short term, is to think about using a Roth IRA for part of the plan. And one reason that I have always talked about the Roth IRA being such a nice multitasking vehicle, is that you can withdraw your contributions at any time and for any reason without taxes or penalty. So even if your intention is to leave the money to grow until retirement, if you need to get at it sooner, you can get in there without many strings attached. So, I think that's a nice vehicle to consider maybe in addition to taxable accounts that you might have for emergency fund needs.

Dziubinski: Great. Well, Christine, thank you for sharing these lessons today and thank you for the makeovers this week.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski from Morningstar.com. Thanks for watching.