(PUB) Investing 2016

17

January 2016

Morningstar FundInvestor

portfolio was to reduce its risk level without forsaking growth. My “after” portfolio brings more balance to their equity stake by boosting their position in high- quality, dividend-paying equities. The “after” portfolio also includes more stand-alone, plain-vanilla bond positions, because part of the fixed-income exposure in their “before” portfolio is embedded in balanced and other multiasset funds. Maintaining distinct bond and stock positions will allow them to use rebalancing to shake out additional cash. Because I’m anticipating that Peggy will roll her 403 (b) into her Traditional IRA upon retirement, I positioned the two accounts as one from an asset-allocation stand- point. Thus, I focused her American Funds 403 (b) largely on equity and allocation funds—which tend to be better options in the firm’s lineup—while down- playing bonds. Meanwhile, I boosted bonds in her Tra-ditional IRA , employing standout core bond funds from Fidelity as well as Fidelity Strategic Real Return FSRRX , an all-in-one inflation hedge. I looked to her Roth IRA to deliver straight-ahead equity exposure, both domestic and foreign, because her time horizon for that piece of the portfolio will be longer. Norm’s 401 (k), meanwhile, includes a number of fine holdings, all of them actively managed. Because many of the 401 (k) options are closed to new invest- ors, it’s not a given that Norm would roll over his 401 (k) into an IRA upon retirement. I retained many of Norm’s original 401 (k) holdings in my “after” portfolio, but I jettisoned some of the most specialized, including Fidelity Mega Cap Stock FGRTX and Fidel- ity Select Pharmaceuticals FPHAX . My most significant change in the 401 (k) was to replace Fidelity GNMA FGMNX —a fine holding in its own right— with Fidelity Total Bond FTBFX , which provides bet- ter-diversified core fixed-income exposure. Because so much of Norm’s 401 (k) is idiosyncratic, I aimed to smooth out its risks by employing index funds in his IRA . As with Peggy’s Roth, broad-market index funds, both U.S. and foreign, deliver well- diversified equity exposure at a very low cost. K Contact Christine Benz at christine.benz@morningstar.comz

After Portfolio

Holding

Market Value

Weight

Peggy’s 403(b): American Funds Capital World Bond CWBFX

$25,000

2.25%

Peggy’s 403(b): American Funds Capital World Growth&Inc CWGIX

$120,000

10.78%

Peggy’s 403(b): American Funds Income Fund of America AMECX

$75,000

6.74%

Peggy’s 403(b): American Funds AMCAP AMCPX

$69,932

6.28%

Peggy’s Traditional IRA: Fidelity Short-Term Bond FSHBX

$38,097

3.42%

Peggy’s Traditional IRA: Fidelity Total Bond FTBFX

$75,000

6.74%

Peggy’s Traditional IRA: Fidelity Strategic Real Return FSRRX

$25,000

2.25%

Peggy’s Roth IRA: Fidelity Spartan Total Market Index Adv FSTVX

$50,000

4.49%

Peggy’s Roth IRA: Fidelity Spartan Global ex-US Index Adv FSGDX

$20,359

1.83%

Norm’s 401(k): BBH Core Select BBTEX

$65,000

5.84%

Norm’s 401(k): Fidelity Total Bond FTBFX

$75,000

6.74%

Norm’s 401(k): Fidelity Small Cap Discovery FSCRX

$35,000

3.14%

Norm’s 401(k): Fidelity Floating Rate FFRHX

$14,691

1.32%

Norm’s 401(k): Fidelity New Markets Income FNMIX

$25,000

2.25%

Norm’s 401(k): Oakmark International OAKIX

$50,000

4.49%

Norm’s Traditional IRA: TIAA-CREF Social Choice Equity TICRX

$39,835

3.58%

Norm’s Traditional IRA: TIAA-CREF Traditional Annuity

$225,008

20.21%

Norm’s Roth IRA: Fidelity Spartan Total Market Index FSTVX

$55,275

4.97%

Norm’s Roth IRA: Fidelity Spartan Global ex-US Index FSGDX

$30,000

2.69%

$1,113,197

100.00%

Their total portfolio is listing toward the growth side of the Morningstar Style Box, with 43% of assets landing there. Healthcare stocks are a big overweighting. The After Portfolio Norm and Peggy estimate that they’ll need about $10 , 500 per month to maintain their current standard of living in retirement, and various fixed sources of income will step in to supply a healthy share of that cash flow. Peggy will earn roughly $3 , 000 a month from her pension, while Norm’s pension will kick in an- other $1 , 500 per month. Norm’s Social Security will contribute another $2 , 600 per month in cash flow, provided he waits until his full retirement age to file for benefits. Thus, the two pensions and Social Sec- urity will supply roughly $7 , 100 of their desired monthly income in retirement. Norm’s annuity will sup- ply an additional component of income when he annuitizes, and his part-time job will kick in an addition- al income component as long as he continues working.

They’ll need to draw their additional cash require- ments from their portfolio, so my aim for the “after”