By Christine Benz, (Morningstar)
CHICAGO (Morningstar) -- Susan, a retired finance executive, has put together an enviable portfolio. She has chosen her investments with care, and it shows. Rather than opting for a portfolio of funds run by household-name firms (though there's not necessarily anything wrong with that), her holdings largely consist of mutual funds overseen by top-notch boutique investment managers such as Royce, Wasatch and Amana. And even more important, she has been an avid saver and a successful investor, amassing a total of more than $2.8 million as of early May. Given her reasonable living expenses, she's in a good spot, even though she could be funding 30 or more years of retirement.So what's the problem? Simply put, Susan's portfolio is out of sync with her life stage. Although she is 55 and recently retired, she has a minuscule bond position (2% of her total portfolio) and an only slightly larger cash stake (13% of assets). Susan is cognizant that her asset mix is more appropriate for someone in accumulation mode than a person actively tapping her portfolio to meet living expenses. "I recognize the need to reduce the volatility of my portfolio as well as to create a steady stream of income to live off of," she wrote.
|At 55, single and already retired, a retired finance executive can have an enviable portfolio but still not be best positioned to pay for another 30 or more years of leisure.|
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Apart from its equity-heavy stance, Susan's portfolio has a lot to recommend it. It consists of three separate components: a rollover IRA, Roth IRA and taxable brokerage account that is her largest pool of assets (more than $2 million). In aggregate, her portfolio leans slightly toward small- and midsize firms and growth stocks over value, but is generally very diversified by investment style, company size, and geography.
Job one for new retirees such as Susan is to take a close look at projected in-retirement living expenses and use that number to determine the viability of their portfolios to cover their income needs during retirement. I used Morningstar's ( MORN) Asset Allocator tool as a starting point for this analysis, taking into account projected income needs of roughly $85,000 per year, assuming a 40-year time horizon, and plugging in a more conservative asset allocation than Susan has now (40% in cash and bonds and the remainder in stocks).
Execution is a key consideration for this (and any other) portfolio makeover. Susan's target allocation calls for a much higher weighting in bonds than she had before, but with a possible bump-up in interest rates during the next few years, it makes sense to enlarge such a portfolio's bond position gradually during the next several years rather than all at once. Doing so will help ensure she gets a range of purchase prices for her bond holdings. Investors such as Susan should also pay attention to asset location as they reposition their portfolios. Younger retirees must remember that they can't begin withdrawing from IRAs until age 59.5, so they'll want to keep cash in taxable accounts. At the same time, it is important to be mindful of the tax costs of holding bonds and other income-producing assets in taxable accounts. In the after portfolio, I tried to strike a balance between tax efficiency and ease of access to money for living expenses; my after portfolio holds some of the highest income producers in the tax-sheltered slots, while stashing lower-income-producing bond funds in the taxable account. Finally, young retirees such as Susan should develop a strategy for tapping Social Security. If they think they have longevity on their side, it may pay to defer receipt of Social Security beyond their normal retirement age -- as late as age 70. This article details some of the key considerations to bear in mind when making this important decision. >To submit a news tip, email: email@example.com.
Twitter and become a fan on Facebook. -- Written by Christine Benz, director of personal finance for Morningstar in Chicago. Benz is also editor of Morningstar Practical Finance, a monthly personal-finance newsletter, and writes a weekly column on Morningstar.com.