A retired military serviceperson crafts a portfolio with an emphasis on income generation.
By Christine Benz | 05-19-11 | 06:00 AM | Email Article

At first blush, Scott's goal of an early retirement appears to be out of reach. At age 48, this former military serviceperson would like to find a way to retire in 10 years, having done several tours of duty in the Middle East. But while he has recently begun to save at an aggressive rate, to date he has amassed $173,000. That's not small change, but it's not enough to fully fund a retirement that could last 30 years or more.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

However, Scott is a lot closer to hitting his goal than it might seem. One big benefit of his military service is that he's already drawing upon a pension that is paying $71,000 per year; that amount will be adjusted to keep pace with the Consumer Price Index. In addition, he's currently working in a U.S. government job; from that position, he will receive a pension that will generate an additional $15,000 per year when he becomes eligible to receive it at age 56. The $86,000 in combined pension income doesn't meet Scott's target income level of $120,000 per year, but it does mean that his income demands from his portfolio are a fairly modest $34,000 per year. When Social Security for Scott and his wife is factored into the income mix, Scott's income demands from his portfolio are lower still.

The fact that Scott's pension covers a large share of his current living expenses has a beneficial side effect for his retirement kitty, too: It means that he can save aggressively for retirement in the years ahead. Scott notes that he saves $5,000 per month in his taxable brokerage account and Roth IRA, and puts another $1,570 per month into the Thrift Savings Plan, which is a defined-contribution plan for federal workers. By saving roughly $80,000 per year, Scott should be able to bulk up his portfolio in short order, even without the benefit of robust market returns.

The Before Portfolio
Scott's portfolio currently features a fairly conservative asset-allocation mix: 42% in stocks, 28% in bonds, and 27% in cash. Another 2% of the portfolio, largely convertible bonds, lands in the "other" bucket.

He holds his assets in a few different silos, such as a Roth IRA, a taxable brokerage account, and the government TSP. His Roth and taxable accounts amount to about three fourths of his total assets, with the remainder in the TSP.

 

Account
Holding
Mkt Value ($)
Weight (%)
Star Rating (Funds)
Star Rating (Stocks)
Taxable
Abbott Laboratories 
5,376
3.12
N/A
Taxable
BlackRock MuniHldgs Inv Qty 
6,767
3.92
N/A
Taxable
Div Growth Trust Ris Div Gr I 
5,141
2.97
N/A
Taxable
DoubleLine Tot Ret Bond 
4,687
2.7
N/A
N/A
Taxable
Energy Transfer Eqty LP 
4,100
2.38
N/A
Taxable
FPA Crescent 
4,040
2.33
N/A
Taxable
IVA Worldwide 
5,184
2.99
N/A
N/A
Taxable
Nuveen Dividend Adv. Muni 3 
5,372
3.1
N/A
Taxable
Procter & Gamble 
6,710
3.89
N/A
Taxable
Royce Intl Smaller-Com 
3,077
1.77
N/A
N/A
Taxable
Sysco 
4,831
2.82
N/A
Taxable
Cash
32,514
18.77
N/A
N/A
Subtotal
 
87,799
 
 
 
 
 
 
 
 
 
Roth IRA
Allianz AGIC Inc & Gr 
3,055
1.76
N/A
Roth IRA
Greenspring 
3,081
1.78
N/A
Roth IRA
Intrepid Small Cap 
2,217
1.28
N/A
Roth IRA
Matthews Asia Small Comps 
2,583
1.49
N/A
N/A
Roth IRA
Matthews Asian Growth & Inc 
5,104
2.94
N/A
Roth IRA
MetWest Tot Ret Bond 
2,050
1.18
N/A
Roth IRA
Templeton Global Bond 
6,355
3.67
N/A
Roth IRA
Thornburg Inv Inc Bldr 
2,024
1.17
N/A
Roth IRA
Cash
12,000
6.92
N/A
N/A
Subtotal
 
38,469
 
 
 
 
 
 
 
 
 
TSP
TSP S Fund (Small and Mid-Caps)
9,110
5.26
N/A
N/A
TSP
TSP G Fund (Guaranteed Gov. Bonds)
19,726
11.37
N/A
N/A
TSP
TSP I Fund (International)
8,933
5.16
N/A
N/A
TSP
TSP C Fund (S&P 500)
9,151
5.28
N/A
N/A
Subtotal
 
46,920
 
 
 
 
 
 
 
 
 
Total
 
173,188
100.02
 
 

 

Scott noted that he's a fan of my colleague, Morningstar's resident dividend guru Josh Peters, and his fondness for income comes through loud and clear when I asked Scott to describe his investment philosophy. "My intent is to patiently build a dividend-growth portfolio and a quality-fund portfolio that will grow to provide the principal needed to generate the income I would like to have to maintain my family's quality of life," he wrote.

Not surprisingly, his taxable and Roth portfolios contain individual dividend-paying stocks, such as  Abbott Laboratories  and food distributor  Sysco  as well as income-focused stock/bond and hybrid funds.  Templeton Global Bond  and BlackRock Muni Holdings Investment Quality , a leveraged closed-end fund, are among Scott's largest individual holdings.

Within the TSP, where the only options are plain-vanilla index funds with very low costs, Scott can't help but keep it simple. His largest position is in the G fund, which provides a compelling risk/reward profile unavailable in the realm of retail funds--a yield in line with long-term Treasuries along with guaranteed stability of principal. He also has smaller positions in an S&P 500 Index tracker (the C fund), an extended market index fund (the S fund), and an international index fund (the I fund). (I wrote about the government's Thrift Savings Plan last year.)

Securities mentioned in this article

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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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