16
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 by year-end, while Joanne,
60
, is aiming to retire two years from now. Social
Security payments, along with a small pension for Ed,
will cover most of the couple’s daily living expenses.
But they are concerned about shouldering Joanne’s
health-care costs from the time she leaves her
employer 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 main-
tained 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 signifi-
cance to us. Thus, travel is a major financial goal.”
But Ed acknowledges that travel to some destinations
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?
The Before Portfolio
Given how long Ed and Joanne have been investing
and the fact that they have multiple accounts—
taxable holdings,
IRA
s,
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 aggres-
sive 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. Their sector expo-
sure is fairly evenly distributed, with the exception
of a slight overweighting in health-care and an under-
weighting in energy.
The After Portfolio
Given that retirement is so close at hand, a sensible
starting point for this couple is to sketch out their
anticipated income needs on a year-by-year basis,
then subtract their certain sources of income such as
Social Security. They can then test the sustainability
of their planned withdrawal rate.
Ed and Joanne are anticipating baseline expenses of
$
76
,
000
plus $
40
,
000
a year for travel. The good
news is that based on their anticipated Social Secu-
rity strategy, with Ed starting at age
70
(to ensure
the maximum allowable benefit and the largest pos-
sible survivor benefit for Joanne) and Joanne
starting Social Security shortly after she retires, this
couple will have $
61
,
000
in inflation-adjusted income
from Social Security per year. Ed’s pension will supply
another $
11
,
000
in annual income per year. That
means their portfolio will only need to supply $
4
,
000
in additional income to meet their living baseline
expenses. When their desired travel costs are added
in, that tab rises to $
44
,
000
.
To help address the sustainability of their desired
portfolio withdrawal rate, I started by giving their
withdrawals a haircut to account for taxes. I assumed
an ordinary income tax rate of
25%
for the with-
drawals from tax-sheltered accounts, and
15%
(the
long-term capital gains rate) for withdrawals from
the taxable account. Even then, their planned with-
drawals—at
2
.
8%
of their starting balance—easily
pass the sniff test for sustainability.
The next step is to determine which accounts they’ll
tap for income on a year-to-year basis, with an
eye toward keeping the income tax burden down. Opti-
mizing withdrawals will soon become a moot point,
as Ed’s required minimum distributions from his
IRA
and
401
(k)s, which kick in when he turns
70 1
/
2
, will
supply much of the income for their living expenses
during their retirement.
A Plan for a Near-Retirement Couple
Portfolio Matters
|
Christine Benz
Welcome to our
new feature,
Portfolio Matters,
by Christine Benz,
Morningstar’s director of
personal finance. We’re
thrilled to have Christine
help you manage the port-
folio challenges that you
face each month. Christine
will address personal
finance issues with prac-
tical solutions throughout
the year.
