Retiree Wonders: What About My Portfolio?

By RUSS WILES

Sept. 18, 1994 12 AM PT

RUSS WILES, <i> a financial writer for the Arizona Republic, specializes in mutual funds</i>

Carl Miller of Sun City, Ariz., has a complaint.

“It’s very difficult to find information as to what your portfolio should look like once you’re retired,” says the 58-year-old former nuclear engineer who retired eight years ago.

“Ninety-nine percent of the articles you read about retirement deal with getting to retirement.”

That may be an exaggeration, but it’s safe to say that retirement-planning coverage focuses on the view of those still working.

Graying baby boomers, in particular, have been a favored audience, and for good reason. Boomers represent a huge market--roughly 78 million Americans were born between 1947 and 1965--and for the most part they have been deemed to be poor savers.

And a large number of them will live well into their 80s and 90s, requiring them to make some investment decisions for the long haul.

But for today’s retirees, especially those who want to keep their cache growing while siphoning off money for living expenses, considerations are a little different.

The best way to accomplish this tricky task, many advisers say, is to remain committed to stock market investments for at least part of your retirement portfolio.

Returns on large stocks have exceeded the inflation rate by an average seven percentage points a year for most of this century, says Ibbotson Associates of Chicago, and small stocks have done even better. But bond returns have surpassed inflation by only about two percentage points annually.

“The question is not whether to include equities, but how much to include,” says Ken Gregory, co-editor of the No-Load Fund Analyst newsletter in Orinda, Calif.

Gregory believes two of his newsletter’s model portfolios would be appropriate for retirees.

The first, a global-balanced mix designed to throw off income, has a mere 40% stake in bond mutual funds, with nearly half that in foreign investments. U.S. stock funds account for 31% of assets and international equity funds another 18%. The remaining 11% is in a real estate stock fund.

The second, a global-balanced portfolio for which income is not a main consideration, is a bit more aggressive. It’s similar to the first portfolio, except that the bond weighting drops to 32% and the foreign-stock percentage climbs to 26%.

Both portfolios would have a low probability of loss for someone willing to hang on at least two full years, Gregory believes.

Sheldon Jacobs, publisher of the No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y., offers a model portfolio for retirees that’s in the same ballpark.

He recommends 45% in domestic stock funds, 35% in bond portfolios and the remainder in international equity investments. Jacobs’ modest bond commitment partly reflects his belief that the bond market isn’t likely to advance much anytime soon.

That both Jacobs and Gregory suggest some foreign-stock holdings for retirees might come as a surprise, especially since both also advocate a modest position in volatile emerging markets.

But foreign investing makes sense from both a diversification and opportunistic standpoint.

“Even for a retired person who is conservative, 5% to 10% in an emerging-markets fund isn’t going to make or break the portfolio,” Gregory says.

The above recommendations are geared for a retiree around age 65; individuals older than that might want to boost income holdings.

These suggestions also assume the person has an investment horizon of at least a few years and doesn’t need to draw down the account quickly to meet living expenses.

An underlying theme to retirement investing is that withdrawing money periodically from stock funds can be better than merely living off the dividends generated by bond funds. This goes against the accepted wisdom of spending the yield but not touching the principal.

“If you have stock funds, reinvest the dividends and take what you need periodically, you may do better because of the growth potential,” agrees Steve Norwitz, a vice president at T. Rowe Price Associates in Baltimore.

He suggests that retirees put 25% to 60% of their investment assets into stock funds.

“Your focus should be more on a suitable asset allocation than the yield per se,” Norwitz says.

People who own international mutual funds tend to be wealthier and slightly older than fund investors in general and are more likely to be men, according to a survey by Scudder, Stevens & Clark in New York.

The typical international-fund owner is 48, earns $66,800 a year and has $159,800 in financial assets. That compares to the typical mutual fund investor, who is 45, earns $57,900 and has financial assets worth $87,200. All of the above figures are medians.

And while 54% of fund owners are men, the ratio climbs to 65% among those holding one or more foreign portfolios.

Scudder’s survey involved telephone conversations with 1,000 fund-owning households nationwide. The results are considered reliable to plus or minus four percentage points.

Former pro football player Willie Davis has become a director of Strong Mutual Funds in Milwaukee. Davis, a Hall of Fame defensive end for the Green Bay Packers, will help oversee the 24 Strong funds, which count combined assets of more than $8 billion.

Davis is president and chief executive of All-Pro Broadcasting, in Inglewood. He also sits on the boards of several prominent corporations, including Dow Chemical, Johnson Controls, Kmart, L.A. Gear, MGM Grand and Sara Lee.

Balancing Act

Portfolios that combine stock and bond mutual funds with money market investments aren’t necessarily all that risky, even for retirees. Shown below are four possible investment mixes and how they would have fared over the 20 years through 1993:

1. Minimal-Risk Portfolio

Composition: 100% cash (money market investments)

Average yearly return: +7.5%

Worst year’s result: +2.9%

Years with negative return: 0

Inflation-adjusted average yearly return: +1.6%

2. Low-Risk Portfolio

Composition: 25% stocks, 40% bonds, 35% cash

Average yearly return: +10.4%

Worst year’s result: -4%

Years with negative return: 2

Inflation-adjusted average yearly return: +4.5%