Should Your Simple Retirement Portfolio Be More Complicated?

hi I'm Susan jinsky with Morning Star now at Morning Star we're big Believers in taking a simple approach to investing in retirement because no one should leave a portfolio of 23 different funds and handful of stocks to their heirs to have to deal with but can you be too minimalist in retirement joining me to weigh in on that topic is Christine Benz Christine is morning Stars director of personal finance and retirement planning as well as host of the Longview podcast and author of a new book that publishes in September how to retire 20 lessons for ay happy successful and Wealthy retirement nice to see you Christine hi Susan great to see you so you've actually created a series of what you've called minimalist retirement portfolios and um viewers can access those on morningstar.com what's the bare minimum of an investments in your mind that someone should be bringing into retirement well I think you could get away with three Holdings so that would be a total World stock market index or ETF uh that would consist of roughly 60% us Equity 40% non- us Equity so that's your Equity exposure some sort of a total bond market portfolio an index fund could serve as your fixed income exposure it's going to include government bonds as well as corporates across the maturity spectrum and then I think cash is Mission critical in retirement to help cover you in a year like 20122 when the stocks and bonds went down at the same time I think that's the bare minimum number of constituents arguably you could have the uh us and non- US Stock pieces be separate funds but that Global portfolio can let you skinny it down even further got it now so let's talk about some key reasons why an investor might want to have a few more Holdings in retirement um at the top of your list is actually some extra diversification that additional Holdings might provide so what additional Investments would you add from a diversification perspective in addition to the ones that we've already discussed so there are two main ones and they mainly are in that or they are in that fixed income sleeve of the portfolio the first one would be some short-term bonds and the idea is that if you encountered a really bad scenario where say 2022 an environment like that stretched down for three years or something like that well the idea would be that if you would spent through that cash piece you'd have kind of your next line reserves in place that you could take so I would add short-term bonds to the fixed income portfolio you can use just sort of a simple short-term Bond Index Fund or an actively managed fund keep the complexion of that portfolio pretty high and then I would also think about adding some treasury inflation protected security exposure and the idea is that if you have a total bond market index or even a short-term Bond portfolio like I just talked about that is going to be not inflation protected so you will find that the purchasing power of that portfolio will dwindle over time that's why you would want to add some uh tips to the portfolio as well in fact some tips enthusiasts might say well forget the total bond market index just hold tips I I suppose you could do that but you are also picking up some interest rate related volatility there as well so I would bolt on uh a a tips fund uh maybe a short Andor intermediate term tips fund in addition to to the constituents that we talked about now you also think that holders of actively managed mutual funds should plan to have a few more Holdings why is that well I think it's mainly because the active managers the good ones are typically going to be picking their spots that they might have a part of the market where they like to do their shopping and they they're not trying to cover the Waterfront with their portfolios so if I have for example an oakmark select in my portfolio or a good Prime C fund probably also want to think about augmenting it with a total market index just to give my portfolio that broad Market exposure that I'm not necessarily getting with those stock Pickers funds so definitely to the extent that you have active funds I'd think about using some index funds alongside of them now we've talked in the past about making withdrawals from your portfolio and retirement and you've often referred to something called surgical withdrawal so let's talk about that and why that might be another reason a retiree might want to actually have a few more Holdings in retirement first explain what surgical withdrawals are and why that might be something to be thinking about when you're building a portfolio in retirement yeah I think a superpower that retirees have is the ability to pick and choose where they can go for cash flows on a year-to-year basis that's not a luxury that you have if if your portfolio is in say a balanced Index Fund as great an investment as that can be you can't say in a bad year for equities hey leave my equities alone I just want my bond withdrawals this year you have to take Prada shares of stocks and bonds and so if you kind of broaden that out and think about managing a whole portfolio in retirement you really do want to give yourself at least a little bit of wiggle room to specify where you go for those withdrawals on a year-to-year basis so in a year like 2022 you probably are pulling from cash to leave your stocks and bonds uh undisturbed in 2023 you probably want to be pulling from us large growth right you want to pull from whatever looks the most opportune so that is I think a reason to maintain at least a few discret Holdings in the portfolio as you get into draw down mode just to give yourself the flexibility to pick and choose where you go for the those withdrawals on an ongoing basis and then last but not least do you think there may be tax reasons to consider when it comes to having maybe a few more Holdings in retirement talk about that yeah and I would say that you know the ability to diversify and take those surgical withdrawals to me are more important reasons but one advantage that the person with multiple Holdings has is the opportunity to do tax loss selling for example in a year like 2022 if you have all of your uh Holdings in you know just a single fund or a couple of funds you'll just have fewer opportunities to benefit from tax loss selling certainly that's an advantage that the individual stockholder has relative to someone who's holding mutual funds where you probably will be able to identify candidates for tax loss selling um you won't necessarily have that if your whole portfolio is broadly Diversified mutual funds again I'm not sure that this is a good enough reason to hold individual stocks but it is a consideration and um you know potentially a benefit to to having more individual Holdings in the portfolio so less is is often more but there are exceptions exactly thanks for your time Christine thank you Susan I'm Susan javinsky with Morning Star thanks for tuning in

Channel: Morningstar, Inc.

Views: 4,840

Keywords: retirement planning, retirement income, retirement investing, simple retirement portfolio, basic retirement portfolio, retirement portfolio

Id: 7EATI1ol4Po

Length: 7min 35sec (455 seconds)

Published: Sat Jun 22 2024