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Portfolio > Portfolio Construction

When a Conservative Retirement Portfolio Works: Morningstar's Benz

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“Conservative” retirement plans may not be a bad thing, depending on certain factors, according to Christine Benz, Morningstar’s director of personal finance in a recent column, Retirement Planning When You Have Enough.

In the piece, she reviewed a retiree’s portfolio and made a determination — at first — that more risk could, and should, be added.

The retiree named Ted is 70, divorced, has about $450,000 in his portfolio, and is very modest with his withdrawals at 2% a year.

Benz first thought Ted’s portfolio, which was 70% in cash and bonds, and the rest in stocks, could be adjusted to bring stocks up to 50%.

Her reasoning: He “could afford to take more risk even if his equity holdings encountered a bear market” as there was “little chance” he would sell at lows, and a more aggressive portfolio would enlarge his balance.

But she had second thoughts. Here’s why:

  • Due to his “very modest spending rate, he could afford to maintain a more conservative asset mix that provided him with more peace of mind.” As she noted, he didn’t need that extra volatility and potential increase of returns because “his portfolio was enough.”
  • “If you’ve won, quit playing the game,” she says, quoting asset-allocation guru Bill Bernstein. In other words, if a portfolio is built up enough to meet a client’s goals, then stop messing with it.
  • The key is withdrawal rate. Many clients spend more than Ted’s 2%, so a portfolio needs to be adjusted to account for that withdrawal rate.

Yet a conservative portfolio has risks, in that factors such as inflation or a lifestyle shock like increased medical expenses, may cut into the retirement fund.

Benz recommended that clients who are thinking about “de-risking” portfolios factor in the low rates of return of fixed income assets, which will make it difficult to earn more than 2% over the next decade.

(Related: How to Invest in Today’s Low-Rates-for-Longer Bond Market)

Ted’s 2% withdrawal rate may be about right for him and for the portfolio, but many retirees won’t be able to live on that amount.

As Benz stated, there are “many moving parts in creating a retirement plan,” and changes have repercussions. An advisor is the best bet to determine what a client wants as well as how the retirement portfolio fits into the big picture, which includes Social Security income.

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