Skip to Content
Investing Specialists

Checking Retirement Readiness--and Streamlining Along the Way

We skinny down the number of holdings for this mid-50s couple who wants to make sure their ample portfolio is on the right track.

Mentioned: , , , , , , , , ,

Portfolio Makeover Profile
Investors: Don and Brenda | Ages: 57 and 55
Assets: $2,053,660 | Key Financial Goals: Portfolio Growth, Retirement Readiness

Don and Brenda are in the home stretch.

At 57 and 55 years old, respectively, they've 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. They've also purchased long-term care insurance, and they will be eligible for health-care coverage from Don's firm if, as planned, he retires before he's Medicare-eligible. They owe about $35,000 on their home but expect to have it paid off within the next three years.

But even though they're in good shape in most key respects, they'd like guidance 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. Don says they're not planning an extravagant retirement and that he and Brenda may downsize residences eventually, which will bring additional assets into the kitty while reducing their property taxes. But they expect to continue living in a high-cost urban center, to remain near their children. They are also helping their kids financially as they embark on their careers. In total, Don and Brenda expect that they'll need about $9,000 a month, in today's dollars, when they're retired.

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).

The Before Portfolio
Don and Brenda's Before Portfolio is somewhat unwieldy, featuring about 60 holdings (including various cash accounts) spread over an array of account types: a 401(k), a rollover IRA, various taxable accounts, and Roth IRAs in each of their names.

An X-Ray of their total portfolio reveals its asset allocation to be roughly 50% equity currently, with the remainder in cash and bonds. The equity portfolio consists of 75% U.S. stocks and 25% foreign equities. Although it has a slight tilt toward growth stocks, it's pretty evenly dispersed across the Morningstar Style Box and doesn't skew heavily toward any one sector. 

The bulk of Don and Brenda's assets are in retirement accounts in Don's name: a rollover IRA from a former employer as well two retirement accounts with Don's current company. One of those accounts is a Traditional 401(k), to which Don is contributing the maximum allowable amount (for people over 50) of $23,000 per year. The other is a fixed-interest account. Although Don can no longer make additional contributions to it, the assets currently in that account (nearly $500,000) are compounding at a guaranteed rate of 5% per year. Like the "G" fund in the Thrift Savings Plan for U.S. government workers, it offers a guaranteed return and stability of principal, as would a cash instrument, but a substantially higher yield than true cash instruments pay today.

Don and Brenda also have Roth IRAs amounting to about $150,000 apiece, primarily invested in equity mutual funds. They also hold taxable assets in various silos: cash accounts and a taxable brokerage account.

In general, the couple has made sensible choices from an asset-location standpoint. Most of their fixed-income holdings are housed within Don's retirement accounts, so the couple is not paying taxes on the regular income distributions that these holdings make. Meanwhile, their Roth IRAs are heavy on equities--logical, given that their time horizon for these assets is fairly long.

Holding Market Value ($) Weight (%) Star Rating Taxable: Cash 145,894 7.10 N/A Taxable: Conoco Phillips (COP) 9,357 0.46 Taxable: JPMorgan Chase (JPM) 9,186 0.45 Taxable: SPDR S&P Dividend (SDY) 11,207 0.55 Taxable: ALPS Alerian MLP ETF (AMLP) 2,515 0.12 Taxable: T. Rowe Price Cap App (PRWCX) 3,506 0.17 Taxable: Chevron (CVX) 3,081 0.15 Taxable: DoubleLine Total Return Bond (DLTNX) 3,084 0.15 Taxable: First Trust Senior Loan (FTSL) 2,981 0.15 N/A Taxable: PowerShares Financial Preferred Portfolio (PGF) 2,608 0.13 Taxable: RiverNorth DoubleLine Strategic Income (RNDLX) 5,070 0.25 Taxable: Verizon Communications (VZ) 3,082 0.15 Taxable: Consumer Staples Select SPDR (XLP) 2,907 0.14 Taxable: SPDR S&P 500 (SPY) 11,686 0.57 Brenda's Roth IRA: Brown Advisory Growth Equity (BIAGX) 55,538 2.70 Brenda's Roth IRA: Hodges Small Cap (HDPSX) 26,996 1.31 Brenda's Roth IRA: JPMorgan Mid Cap Value (JAMCX) 19,011 0.93 Brenda's Roth IRA: Scout International (UMBWX) 49,982 2.43 Don's Roth IRA: Money Market Fund 192 0.01 N/A Don's Roth IRA: Bank of New York Mellon (BK) 7,301 0.36 Don's Roth IRA: Royce Total Return (RYTFX) 24,709 1.20 Don's Roth IRA: Vanguard REIT Index (VNQ) 16,737 0.81 Don's Roth IRA: Technology Select Sector SPDR (XLK) 34,735 1.69 Don's Roth IRA: Matthews Pacific Tiger (MAPTX) 7,222 0.35 Don's Roth IRA: Oppenheimer Dev Mkts (ODMAX) 20,458 1.00 Don's Roth IRA: ETF Physical PM Basket Shares (GLTR) 14,706 0.72 N/A Don's Roth IRA: Wasatch Intl Growth (WAIGX) 21,374 1.04 Don's Roth IRA: Consumer Discr Select SPDR (XLY) 8,228 0.40 Don's Rollover IRA: Cash 427 0.02 N/A Don's Rollover IRA: Aflac (AFL) 11,655 0.57 Don's Rollover IRA: Cigna (CI) 9,291 0.45 Don's Rollover IRA: Covidien (COV) 11,020 0.54 Don's Rollover IRA: EOG Resources (EOG) 12,224 0.60 Don's Rollover IRA: Int'l Paper (IP) 10,763 0.52 Don's Rollover IRA: State Street Corp (STT) 12,211 0.59 Don's Rollover IRA: Vanguard Growth Index (VUG) 83,912 4.09 Don's Rollover IRA: Vanguard High Dividend Yield (VYM) 53,762 2.62 Don's Rollover IRA: SPDR S&P Homebuilders (XHB) 16,604 0.81 Don's Rollover IRA: Vanguard Mid-Cap (VO) 12,688 0.62 Don's Rollover IRA: iShares Russell 2000 (IWM) 12,686 0.62 Don's Rollover IRA: Vanguard Glb ex-US Rl Est (VNQI) 9,634 0.47 Don's Rollover IRA: Artisan Int'l (ARTIX) 50,220 2.45 Don's Rollover IRA: Am Cent Gov't Bond (CPTNX) 59,316 2.89 Don's Rollover IRA: MetWest Total Return Bond (MWTRX) 69,185 3.37 Don's Rollover IRA: PIMCO Total Return (PTTDX) 59,438 2.89 Don's Rollover IRA: TIAA-CREF High Yield (TIYRX) 32,086 1.56 Don's Rollover IRA: Vanguard Equity-Income (VEIRX) 110,884 5.40 Don's Rollover IRA: Vanguard Interm Inv Grade (VFIDX) 30,479 1.48 Don's Rollover IRA: Vanguard GNMA (VFIIX) 9,597 0.47 Don's Rollover IRA: Vanguard Infl Prot Sec (VIPSX) 37,545 1.83 Don's 401(k): JPMorgan Equity Income (OIEJX) 21,291 1.04 N/A Don's 401(k): Vanguard Total Bond Mkt (VBTIX) 59,433 2.89 Don's 401(k): Vanguard Mid Cap (VMCIX) 46,293 2.25 Don's 401(k): Oppenheimer Develop Mkts (ODVYX) 30,285 1.47 Don's 401(k): Vanguard Small Cap Index (VSCIX) 46,133 2.25 Don's 401(k): Wells Fargo Advantage Growth (SGRNX) 17,522 0.85 Don's 401(k): Fidelity Spartan 500 Index (FUSEX) 78,025 3.80 Don's 401(k): Harbor Int'l (HAINX) 50,232 2.45 Don's Retirement Account: Guaranteed Option 465,465 22.67 N/A Total $2,053,660 100

The After Portfolio
A strong market environment like the one investors have enjoyed for the past five years can lead to retirement-planning mistakes. Investors might be tempted to incorporate overly robust return assumptions into their planning, which could lead them to think they can withdraw more from their portfolios, or take more or less risk, than would be ideal. After all, the equity market has enjoyed a threefold increase since bottoming in 2009 ago, and stock valuations, while not egregiously high, aren't low, either. Not-cheap market valuations heighten "sequence-of-return risk" for new retirees--the odds that they'll retire only to see the market drop shortly thereafter. Currently low bond yields are another headache for retirement planning, in that they foretell much more meager returns from the asset class in the decades ahead than retirees enjoyed in the 1990s and 2000s.

That said, Don and Brenda have a couple of factors working in their favor. First, they don't expect to retire for another seven years, so even if the market drops in the near term, their portfolio can still recover before they begin taking withdrawals. Moreover, they'll continue to make retirement plan contributions--they're maxing out both Don's 401(k) and their Roth IRAs--which will help offset, at least in part, any losses their equity holdings rack up. The couple also has a valuable asset on the fixed-income side, in that a portion of Don's retirement portfolio is earning a guaranteed 5%--an unheard-of rate of return in the current environment. Not only does that amp up their portfolio's return potential versus portfolios holding an equivalent amount in cash, but, in a worst-case scenario in which they retire into a bear market, they would be able to withdraw from that account before touching any of their long-term assets.

Thus, the couple's current portfolio appears to be on track to support their desired in-retirement distributions, particularly when you factor in their expected Social Security benefits of more than $4,000 per month. (Don says he and Brenda are just learning about the various strategies for maximizing their Social Security benefits, noting that the so-called file-and-suspend strategy appears to be a good fit for them.) That takes their desired portfolio distributions down to about $60,000 per year, easily passing the 4% sniff test for sustainable withdrawal rates, even if their portfolio takes a hit from current levels.

That said, I think their 50% equity/50% bond-and-cash asset allocation is too conservative given their time horizon of 30 years or more. The After Portfolio has a 60% equity position. To achieve that higher equity weighting, I cut their bond holdings from their taxable account, a move that also helps improve the tax efficiency of that portion of their portfolio. I also reduced the fixed-income exposure in Don's rollover IRA. Given that stocks aren't a screaming buy right now, I'd recommend dollar-cost averaging into enlarged positions.

And even though Don doesn't think their number of holdings is unwieldy, I think streamlining is a worthy goal for this couple, so they don't have so many moving parts to keep track of as retirement draws near. I'd like to see them reduce the number of individual stocks and sector-specific exchange-traded funds in favor of broadly diversified funds. (If any of Don and Brenda's taxable holdings have appreciated sharply since purchase, they'll want to take tax costs into consideration before selling those holdings.) 

In the interest of keeping the portfolio's costs down, it makes sense to stash more specialized asset types in Don's 401(k) plan, where he can avail himself of lower-cost institutional share classes. Thus, I'd jettison  Oppenheimer Developing Markets (ODVYX) in his Roth and enlarge the position in the lower-cost share class in his 401(k) instead.

Yet streamlining has its limits, especially as retirement draws close. Whereas a portfolio's total asset allocation is what matters for accumulators, the asset allocation of each silo--401(k), taxable, Roth--becomes more important as a retiree gets closer to tapping each of those pools of money. Retirees can keep themselves in a lower tax bracket by strategically pulling money from various account types as they move through retirement. But in order to do that successfully, each account type needs to have a mix of short-term assets for liquidity and long-term assets for growth. 

Once retirement draws near, Don and Brenda should check in with a tax advisor to get some help on the ideal sequence of withdrawals during retirement. That, in turn, will help inform the ideal positioning of each pool of money. (For example, they may want to carve out some safe assets in their Roth, in case it's advantageous to pull withdrawals from Roth accounts in certain years.) Don and Brenda should also consider checking in with a tax advisor to assess whether they could conduct partial Roth conversions of Don's rollover IRA without pushing themselves into a higher tax bracket. The first years of their retirement--once Don has stopped working and before required minimum distributions kick in--could be an ideal time to do so.

In general, I sought to trim some of those asset classes that have performed especially well during the past several years, especially small-cap stocks and lower-quality bonds, in favor of high-quality equity and bond exposure. I also aimed to ensure that every one of their accounts has a well-diversified core rather than niche offerings and sought to maintain a balance between actively managed and index products.

Holding Market Value ($) Weight (%) Star Rating Taxable: Cash 116,164 5.66 N/A Taxable: Vanguard Total Stock Market (VTI) 100,000 4.87 Brenda's Roth IRA: Brown Adv Gr Eq (BIAGX) 100,000 4.87 Brenda's Roth IRA: Harding Loevner Intl Eq (HLMNX) 51,527 2.51 Don's Roth IRA: Royce Total Return (RYTFX) 25,664 1.25 Don's Roth IRA: Wasatch Intl Gr (WAIGX) 30,000 1.46 Don's Roth IRA: Vanguard High Dividend Yield (VYM) 100,000 4.87 Don's Rollover IRA: Artisan Int'l (ARTIX) 165,000 8.03 Don's Rollover IRA: MetWest Total Return Bond (MWTRX) 75,000 3.65 Don's Rollover IRA: Fidelity High Income (SPHIX) 25,000 1.22 Don's Rollover IRA: Vanguard Equity-Income (VEIRX) 350,000 17.04 Don's Rollover IRA: Vanguard Infl Prot Sec (VAIPX) 50,627 2.47 Don's Rollover IRA: UBS E-TRACS Alerian MLP Inf (MLPI) 50,000 2.43 Don's 401(k): JPMorgan Equity Income (OIEJX) 50,000 2.43 N/A Don's 401(k): Vanguard Total Bond Mkt (VBTIX) 59,213 2.88 Don's 401(k): Oppenheimer Develop Mkts (ODVYX) 25,000 1.22 Don's 401(k): Fidelity Spartan Extended Mkt Idx (FSEMX) 50,000 2.43 Don's 401(k): Fidelity Spartan 500 Index (FUSEX) 100,000 4.87 Don's 401(k): Harbor Int'l (HAINX) 65,000 3.17 Don's Retirement Account: Guaranteed Option 465,465 22.67 N/A Total $2,053,660 100




Data as of June 2 

See More Articles by Christine Benz

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.