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A Plan for a Near-Retirement Couple Portfolio Matters | Christine Benz

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.

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

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.