The bucket strategy helps tee up near-term distributions and set long-term allocations.
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By Christine Benz | 05-23-13 | 06:00 AM | Email Article

Portfolio Makeover Profile
Investors:
Ed and Joanne | Ages: 68 and 60
Assets: $1,817,597 | Key Financial Goals: Funding Retirement, Including a Lot of Travel

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.

With $1.8 million in their retirement kitty, Ed and Joanne wouldn't seem to have a lot to worry about when it comes to funding this next phase of their lives. Ed, 68, hopes to retire fully from his career in the financial-services industry by year-end, while Joanne, 60, is aiming to retire from her position in education administration two years from now. Social Security payments, along with a small pension for Ed, will cover most of the couple's daily living expenses in retirement. But even as they're looking forward to sharing retirement, the couple is concerned about shouldering Joanne's health-care costs from the time she leaves her employer (and its health-care plan) until she's eligible for Medicare in 2018.

An even bigger issue for this couple, Ed writes, is "balancing the maximization of life (travel) with the fear of outliving our funds." Ed notes that travel is "our only real extravagance," writing, "We have maintained what we think is a very controlled standard of living over the years, considering our income and net worth. The big-ticket items for a lot of Americans--housing and automobiles--have had reduced significance to us. Thus, travel is a major financial goal for the remainder of our lives, as long as our health allows."

But Ed acknowledges that crossing some of the far-flung destinations off their bucket list won't come cheaply. How can he and Joanne craft a retirement plan that will enable them to take maximum advantage of those years when they're both healthy and able to travel while also ensuring that their retirement assets can last 25 years or more? This couple's age gap, while not large, is another complicating factor. Thus, they would like a second opinion on their planned in-retirement withdrawal rate, as well as the makeup of their portfolio.

The Before Portfolio
Given how long Ed and Joanne have been investing and the fact that they have multiple accounts--taxable holdings, IRAs, 401(k)s, and 403(b)s--their portfolio is quite streamlined and features just 18 holdings. Most of their assets reside within the confines of tax-sheltered vehicles, meaning their withdrawals from those accounts will be fully taxable.

Their total long-term portfolio features a fairly aggressive asset mix: 61% in equities, one third of which is in foreign stocks, and 38% in bonds. Their aggregate Morningstar Style Box exposure tilts toward growth stocks, with 45% of their total exposure landing in the right-hand side of the style box. (For comparison's sake, 33% of the global market capitalization lands in growth stocks.) Their sector exposure is fairly evenly distributed, with the exception of a slight overweighting in health-care stocks and a bias against energy stocks relative to the S&P 500.

Ed's IRA constitutes the couple's largest pool of assets by far, at nearly $1 million. His IRA features some of Morningstar analysts' favorite funds, including  Vanguard Primecap ,  Dodge & Cox Income , and  Sequoia . The couple's sole individual stock position is a quasi-mutual fund in and of itself,
 Berkshire Hathaway . They have only a small holding in Berkshire currently, having trimmed it back in 2012. "Oh yeah, that was a great decision," quipped Ed. "We sold at $85 and it's now selling at $112." Ed also has a 401(k), which is invested in DFA Global Equity , a world-stock fund that emphasizes small- and mid-cap names.

Joanne has a few separate pools of assets: her 403(b), invested in  PIMCO Total Return (the largest holding in her name); her IRA, invested in  Vanguard Total Bond Market Index ; and her pension assets, invested in a low-cost S&P 500 index tracker.

The couple's taxable assets consist of three long-held stock funds: a sizable position in  Columbia Acorn ,  Mutual Shares , and  Primecap Odyssey Aggressive Growth . They also have a small position in  Vanguard Short-Term Federal .

Holding
Market Value ($)
Weight (%)
Star Rating
Ed's IRA: Berkshire Hathaway
4,736
0.26
Ed's IRA: Dodge & Cox Income
118,737
6.53
Ed's IRA: Harbor International
136,143
7.49
Ed's IRA: Sequoia
87,400
4.81
Ed's IRA: Vanguard Convertible Securities
40,791
2.24
Ed's IRA: Vanguard Primecap
66,275
3.65
Ed's IRA: UST Inflation Indexed Bond
60,201
3.31
N/A
Ed's IRA: Jensen Quality Growth 
139,711
7.69
Ed's IRA: Scout International
177,613
9.77
Ed's IRA: Vanguard Wellington
129,762
7.14
Ed's 401(k): DFA Global Equity R2
90,617
4.99
Joanne's IRA: Vanguard Total Bond Mkt Idx
145,311
7.99
Joanne's 403(b): PIMCO Total Return
223,487
12.30
Joanne's Pension: Principal Lg Cap S&P 500 Idx
68,609
3.77
Taxable: Columbia Acorn
179,599
9.88
Taxable: Mutual Shares
58,314
3.21
Taxable: Primecap Odyssey Aggressive Growth
75,732
4.17
Taxable: Vanguard Short-Term Federal
14,559
0.80
Total
1,817,597
100

 

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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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