Many retirees consider an investment portfolio made up of bonds just like a rocking chair--comfortable and safe.
Now that Harry Schwartz is about to turn 70, he wonders if he should stop riding the highs and lows of the stock market and invest solely in something more appropriate for his age group, like corporate or municipal bonds.
But that's just not a good idea for Schwartz and many other retirees, said Victoria Collins, a certified financial planner in Irvine.
Retirees like Schwartz are more active these days and their investments should be just as active, according to Collins. Because the elderly are living longer than ever, they need to make sure their investments are working for the long haul. Even in the later years of an investor's life, a portfolio should not only provide a steady income stream, but also continue to grow to offset inflation.
"One of the biggest mistakes I have found people making in their retirement planning is to be too conservative when they are in their 60s and 70s," Collins said. "People think that as soon as you retire you should move into all bonds and that's just not the case, given longevity and inflation."
Schwartz, a retired manager of contracts for Hughes Electronics who still puts in a few hours occasionally as a mortgage banker, and his wife, Lee, a retired journalism professor, have grown their net worth by successfully and aggressively investing in the stock market. The pair met when Lee was a newspaper reporter in Syracuse, N.Y., and Harry was a young executive at General Electric. Their marriage has lasted 43 years.
Unusual for their age group, both worked throughout much of their marriage, helping to create an investment portfolio of about $1 million, which puts the couple in the top 1.8% of American households.
Four decades of hard work, regular saving by two working partners and living within their means helped the couple amass their net worth, which includes $210,000 in home equity, $300,000 in second mortgages, nearly $100,000 in municipal bonds, $250,000 in company pension plans and $150,000 in the teachers' pension plan, which is invested by the state.
Because Harry is turning 70 next year and will begin to take $10,000 each year from his $200,000 in individual retirement accounts, he wants to make sure his investment funds in the IRAs are properly allocated so that he is not withdrawing money as his assets are losing value. (And because his father will be 93 next year, Harry also expects to live a long life.)
Right now, that IRA portfolio is 50% in stocks and 50% in bonds.
"My worry is that the money will be vulnerable to the whims of the stock and bond markets," Harry said. "Which could be bearish next year and not in my best interests for a withdrawal."
As a result, he is considering putting the entire $200,000 in IRA money into high-grade corporate bonds yielding an average of about 6.6%.
But if he wants to minimize market volatility, Collins points out, selling his portfolio and investing in high-grade corporate bonds won't give Harry much growth, and he will be exposed to even more interest rate risk.
An entire portfolio of bonds isn't right for Harry, who doesn't need their steady income, given that his other assets are providing income and financial security. He would be better hedged against market swings with a more balanced portfolio, she said.
Instead, what the couple needs to do is reallocate their IRA assets.
First of all, Harry has been very good at choosing the funds he has. But he needs some different assets in his portfolio. He currently owns no stocks in mid-size or small U.S. companies and no international stocks.
"You've been in the right place," Collins said. "But now we're adding more eggs or assets to your basket to lower the risk and improve your potential for return over time."
Because he already has fixed-income investments as part of his overall assets, Collins thinks Harry should boost the percentage of stocks in his IRA portfolio from about 50% to 60%.
"At 70, you've seen the ups and downs of the market, so why not ride another 20 years?" said Collins. "Don't change your strategy because you are turning 70."
In her book on retirement, "Your Next Fifty Years--How to Decide When and Whether You Should Retire," to be published in April, Collins disputes the theory that the elderly should have most, if not all, of their assets in fixed-income investments such as bonds.
If Harry lives another 20 to 25 years and inflation is 3.5% to 4% per year, his purchasing power will decrease every year. If he invested in a portfolio of all bonds with a 6.6% return, it may only grow by about 2% a year or less, considering inflation and taxes, Collins said.
Because Harry is looking forward to a long life and needs growth to offset inflation (and expects the stock market to decline only 5% next year), he can have more exposure to stocks in this $200,000 portion of his portfolio, Collins said.
His $200,000 should be invested 13.3% in U.S. large-company stocks, 13.3% in medium-size company stocks, 13.3% in small-company stocks, 20% in international stocks, 19.5% in U.S. intermediate bonds, 10% in U.S. short-term bonds and 7.5% in high-yield bonds, with the rest in cash.
Collins argues that international stocks can act as a hedge against U.S. stocks by lessening losses from a market decline. If U.S. stocks are declining, foreign markets might be rising, or at least not falling as much, she argues.
Harry wonders if he needs to make these changes by Jan. 1 or before he turns 70, but Collins said changes can be made over time.
"Good designs of a portfolio don't have to be done this week or next week--they can be done any time," she said. "It's important to think long-term."
The couple should have plenty of retirement funds to last through the years and still leave part of their estate to two children, Paul, 42, and Joyce, 40.
Now, Harry wonders how he would pay for a nursing home for Lee if she needs one due to increased health problems.
Three years ago, Lee, 72, was found to have a brain tumor. When it was removed, she was left with some muscle difficulty, and one of her legs recently snapped when she tripped on a vacuum hose.
Nursing home costs would be about $4,000 a month, and an average stay at a nursing home is about 2.5 years, bringing the estimated cost to $120,000.
Collins says Harry should consider a reverse mortgage on the $210,000 Diamond Bar home he and Lee own outright. Reverse mortgages allow property owners over the age of 62 with low or no mortgage debt to convert their frozen equity into cash through open lines of credit or a loan secured by the home. The loans generally don't have to be paid off until the owner moves or dies.
"The reverse mortgage is an option," Collins said. "Whether it makes sense depends on Harry's health at the time and Harry's investments. You certainly could have enough to pay at least two years of nursing home care and still have enough to be comfortable . . . from the assets you already have."
What do Harry and Lee get for their make-over?
They get a balanced portfolio of IRA investments that can continue to grow and offset inflation during their retirement years. They also get a plan on how to deal with nursing home costs should they occur.
Most of all, they get peace of mind that their hard-earned retirement funds will be working for them when they need it most, said Collins.
Debora Vrana is a Times staff writer. She can be reached at firstname.lastname@example.org
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week's Make-Over
Investors: Harry and Lee Schwartz
Ages: 69 and 72
Occupations: Harry is a retired manager of contracts and an occasional mortgage banker; Lee is a retired journalism professor
Combined annual income: $26,000
Primary investment goals: Decide how to allocate about $200,000 in IRA money
Current IRA Portfolio
U.S. bond funds:
43% Vanguard Long-Term Government Bond
5.5% Vanguard High Yield
U.S. stock funds:
26% Invesco Industrial Income
25% Gabelli Growth and Janus Twenty
Being retired is not a reason to switch all of one's assets to fixed-income investments such as bonds. It's important for all investors, working or retired, to consider how all of the puzzle pieces fit together in light of investment goals, stage of life and need for diversity. For the Schwartzes, who have about $200,000 in IRA accounts, it would be wise to diversify their IRA mix to include foreign investments and a greater, not lesser, percentage of stocks.
Recommended IRA Portfolio
20% in international stocks:
Janus Worldwide, (800) 525-8983
Montgomery International Small Cap, (800) 572-3863
13.3% in U.S. large-company stocks
Dreyfus S&P; 500 Index, (800) 645-6561
13.3% in U.S. mid-size company stocks
Rainier Small/MidCap Equity Portfolio, (800) 282-2340
13.3% in U.S. small-company stocks
Dreyfus Small Company Value, (800) 645-6561
PBHG Emerging Growth Fund, (800) 433-0051
19.5% in U.S. intermediate U.S. bonds
SteinRoe Intermediate Bond, (800) 338-2550
10% in U.S. short-term bonds
Hotchkis & Wiley Low Duration, (800) 346-7301
7.5% in high-yield bonds
Vanguard High Yield, (800) 662-7447