As clients age, the decumulation of retirement savings takes center stage. This process begs the question: How can advisors adjust current portfolios, even slightly, to best help older clients?
Christine Benz, Morningstar’s director of personal finance recently reviewed the portfolio of a married couple in their 70s, who mainly live off his Social Security and her teacher pension, as well as a sizable investment portfolio of $1.4 million. They bought their home in the early 1970s for $43,000, and it’s valued at $1.3 million today.
The couple depend on their two income streams, drawing down about $25,000 a year from the portfolio. They’ve wondered if their portfolio, heavily weighted in equities, might need a makeover.
Historically, the portfolio’s makeup has been about 65% equities (47% U.S. stocks and 18% foreign stocks), 33% bonds and 1% cash.
In looking at the portfolio, Benz noted that it’s been tilted toward value (vs. growth) and has been underweight big-cap tech stocks. Plus, it’s favored actively managed funds; for example, two of its largest weightings were positions in the Mairs & Power Growth (MPGFX) and Vanguard Wellington (VWELX) funds.
The fixed income exposure also was “idiosyncratic,” Benz noted. It had high-quality bond exposure via the Vanguard Wellington and Vanguard Wellesley Income (VWINX) funds, but its largest holding was the Pimco Income Fund (PONAX) that “has sizable exposure to higher-yielding lower-quality credits,” she said.
With two income streams and a low level of yearly portfolio drawdowns, “It didn’t make sense for them to hold a huge stake in cash and bonds,” Benz explained.
Her ‘after’ portfolio includes a 41% allocation to these low-returning asset classes, made up of 37% bonds and 4% in cash. This represents a roughly 20% increase in fixed income/cash than the previous holdings, which were 33% bonds and 1% cash, but not a radical tilt toward these holdings.
The equity allocation actually fell to about 58% from 65%, and it’s now weighted 41% U.S. stocks and 17% foreign stocks. Benz noted that the Vanguard Wellesley Income fund does well during equity-market stress, which she kept at its 14.65% of portfolio weighting.