A couple in their late 50s mulls the prospect of coming up short.
By Christine Benz | 05-20-11 | 06:00 AM | Email Article

In the final installment of Morningstar's Portfolio Makeover Week, we wanted to discuss a common investor profile: people who are getting close to retirement but are concerned they haven't saved enough. We didn't hear from any real-life users who are in this predicament, but we know it's a big demographic. Today's Portfolio Makeover is, therefore, a composite profile of several users we've heard from over the years. 

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.

If they could do it over, Jack and Marion wouldn't change a thing.

At ages 56 and 57, respectively, they've raised three children, now in their mid- to late 20s. They've helped pay for college, taken memorable family vacations, and paid off the house they've lived in since the mid-1980s. They also recently helped foot the bill for a wedding for their son and his new wife. They feel rich in the truest sense of the word.

But as they hurtle toward their retirement years, they're also a little nervous about what the future holds. Jack is a sales manager for an industrial-manufacturing firm, and Marion works 30 hours a week in a medical office. Although both enjoy their jobs, they'd like to start thinking about their retirement: when, where, and how. They're also concerned about the sustainability of what they've managed to set aside. As part of the first wave of baby boomers who are retiring without pensions, they'll be relying on their own assets and Social Security to cover their living expenses once they stop working.

They want to make sure they can draw a livable level of income from their investments during retirement without running out of money prematurely. They acknowledge that their retirement plan may entail some compromises, such as continuing to work longer than they expected to, downsizing to a smaller home, or scaling back their planned in-retirement expenses. Jack and Marion would also like help in maximizing their investments right now while they're still accumulating, so they can be well-positioned for retirement.

The Before Portfolio
Like many people at this life stage, Jack and Marion have a grab-bag of different investments stashed in different accounts: 401(k)s at both of their employers, a rollover IRA, and some taxable savings. Across all accounts, their current asset allocation is roughly 45% stocks, 30% bonds, and the rest in cash.

Account
Holding
Mkt Value ($)
Weight (%)
Star Rating (Funds)
Star Rating (Stocks)
Marion 401(k)
Am Fnd Am Bal 
33,000
3.44
N/A
Marion 401(k)
Am Fnd Bnd Fnd of Am 
43,000
4.48
N/A
Marion 401(k)
Am Fnd EuroPacific Gr 
27,000
2.82
N/A
Marion 401(k)
Am Fnd Gr Fnd of Am 
24,000
2.5
N/A
Marion 401(k)
Am Fnd SMALLCAP Wld 
19,000
1.98
N/A
Subtotal
 
146,000
 
 
 
 
 
 
 
 
 
Jack 401(k)
Company Stock
70,000
7.3
N/A
Jack 401(k)
Dodge & Cox Income 
95,000
9.91
N/A
Jack 401(k)
Fidelity Contrafund 
105,000
10.99
N/A
Jack 401(k)
Stable Value Fund
70,000
7.3
N/A
N/A
Jack 401(k)
T. Rowe Mid-Cap Gr 
50,000
5.21
N/A
Jack 401(k)
Morgan Stanley Intl (Clctv Trst)
75,000
7.82
N/A
N/A
Subtotal
 
465,000
 
 
 
 
 
 
 
 
 
Taxable
Deere 
62,000
6.47
N/A
Taxable
iPath DJ-UBS Cmd Idx 
22,000
2.29
N/A
N/A
Taxable
PowerShares DB Ag 
15,000
1.56
N/A
N/A
Taxable
Rio Tinto 
33,000
3.44
N/A
Taxable
Cash
122,000
12.7
N/A
N/A
Subotal
 
254,000
 
 
 
 
 
 
 
 
 
Rollover IRA
Vngrd Energy 
22,000
2.29
N/A
Rollover IRA
Vngrd GNMA 
25,000
2.61
N/A
Rollover IRA
Vngrd Tot Bond Mkt Idx 
22,000
2.29
N/A
Rollover IRA
Vngrd Wellington 
25,000
2.61
N/A
Subtotal
 
94,000
 
 
 
 
 
 
 
 
 
Total
 
959,000
100.01
 
 

 

Jack's 401(k) is the largest share of this couple's retirement nest egg. His employer is a large firm, so he has been able to take advantage of a broad selection of high-quality, low-cost investment options. His biggest 401(k) holding for many years has been  Fidelity Contrafund , but he also holds positions in  Dodge & Cox Income ,  T. Rowe Price Mid Cap Growth , and an international equity collective investment trust (essentially a private-label mutual fund) managed by Morgan Stanley. Jack also has a large share of his portfolio in the stable-value option, which delivers a higher yield than a money market fund but also provides a stable net asset value. Finally, he holds a large stake in the stock of his employer. He acknowledges that it's a larger position than it should be, but his company has been on a hot streak since the market trough two years ago, and he hasn't wanted to peel back.

American Funds is the investment provider for Marion's 401(k) plan, and her assets are well-diversified across the lineup. Unfortunately, however, her investment options aren't the low-cost choices that one normally associates with the firm. Rather, the share classes in her plan are costly, encompassing the administrative costs of the 401(k) plan as well as the costs of fund management. That means that core funds such as  Growth Fund of America , normally a bargain, cost nearly 1.5% per year.

The pair has another slice of money in an IRA rollover account held at Vanguard. Finally, in their taxable account, the couple has a sizable cash position. Jack has also dabbled in individual stocks, including several companies in his own industry. Recently, he has embraced exchange-traded funds as a way to gain exposure to entire industries whose prospects he thinks are bright.  Powershares DB Agriculture  was a relatively recent addition, and the couple also holds a commodity tracker,  iPath DJ UBS Commodity Index , an exchange-traded note.

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Christine Benz has a position in the following securities mentioned above: RIO Find out about Morningstar's editorial policies.
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