Living, Warily, Off the Portfolio

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Living, Warily, Off the Portfolio
Cybele Weisser. Money. New York: Jun 2005.Vol.34, Iss. 6; pg. 64, 2 pgs
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Abstract (Document Summary)
In the mid-'90s, Larry Elgin was unexpectedly laid off from his marketing job, just two years shy of a
full pension. So he rolled the $140,000 in his 401(k) into an all-stock IRA. For a few years, the stock
market cooperated nicely. Then came the bear market, and the Elgins' portfolio lost 50% of its value
by 2002. The Elgins got rid of many of their individual stocks, replacing them with stock and bond
mutual funds. The IRA has rebounded to $250,000, but the couple still aren't sure that's enough. In
addition to the $45,000 a year they receive from Social Security and Larry's pension, they've been
withdrawing about 6%, or $15,000, a year from their IRA. To maintain their current 6% pace of
withdrawals and not run out of money, the Elgins need a stock and bond portfolio that reliably earns
at least 6% a year on average with minimal risk of a big down year. Tall order. Financial planner
Christopher Brown suggests that going forward the Elgins keep $45,000, or three years' worth of
withdrawals, in money-market and short-term bond funds. He would divide the remaining $205,000
among stock funds (55%), bond funds (30%) and assets such as REITs that typically diverge from
the stock market's performance (15%).
Full Text (881 words)
Copyright Time Incorporated Jun 2005[Headnote]
They want a certain income; they need to make their money last BY CYBELE WEISSER
For Larry Elgin, retirement came fast-and managing postwork finances has grown tricky. In the mid'90s, Larry was unexpectedly laid off from his marketing job, just two years shy of a full pension. He
knew his reduced benefit wouldn't be enough to support himself and his wife Eileen in retirement,
but he couldn't find a job that paid close to what his old one did. So he rolled the $140,000 in his
401(k) into an all-stock IRA, picked up a little consulting work and wished for the best. "My hope at
the time was that the equities would grow to the point at which it would set us up for the rest of our
lives," says Larry, 68. For a few years, the stock market cooperated nicely. By the time Eileen, now
65, retired from her job as an operations specialist at abank in 1998, Larry's IRA had doubled, and
he decided to fully retire. Two years later, it had reached $340,000.
Then came the bear market, and the Elgins' portfolio lost 50% of its value by 2002. Fearing their
retirement was in jeopardy, the Enfield, N.H. couple got rid of many of their individual stocks,
replacing them with stock and bond mutual funds. "I took a chance on the market," admits Larry.
"Maybe it was kind of naive on my part, but what else could I do?"
Where they are now
The Elgins' IRA has rebounded to $250,000, but the couple still aren't sure that's enough. In
addition to the $45,000 a year they receive from Social Security and Larry's pension, they've been
withdrawing about 6%, or $15,000, a year from their IRA to provide a comfortable life that includes a
few weeks in Florida. "I know I'm going to have to dip into the principal somewhat, but the goal
would be to do that as little as possible," says Larry. He's worried that he's wasting money on high
management fees and nervous that the couple's 65% equity stake is still too high. "If we have
another three years like 1999 to 2002, that would really kill us," he says.
What they should do
To maintain their current 6% pace of withdrawals and not run out of money, the Elgins need a stock
and bond portfolio that reliably earns at least 6% a year on average with minimal risk of a big down
year. Tall order. To give the Elgins a shot, Gaithersburg, Md. financial planner Christopher Brown
proposes a riskier strategy-one that involves a larger holding of stocksthan he would normally
recommend. Brown and other planners typically prefer that retirees aim for a lower return and
withdraw no more than 4% of their assets each year (see money.com/longview). The good news:
The strategy is less risky than what the couple is doing now, and it cuts their investment expenses.
The Elgins are paying an average of 1.53% a year in fees for the 13 mutual funds in their IRAs, as
well as additional trading and management costs. Brown recommends that they shift their IRA to a
discount brokerage house where they'll have access to a variety of low-cost funds. That move alone
will save them more than half a percentage point in fees and increase their yearly returns, all else
being equal, by $1,300 or so.
More worrisome, says Brown, is that the Elgins' portfolio is far too heavily concentrated in large-cap
growth stocks, which increases the risk of losses. Worse, 11% of their money is in two software
stocks, Microsoft and a small company called Entrust. Since many of the Elgins' mutual funds count
Microsoft as atop holding, Brown notes, the couple essentially have 21% of their portfolio in
software-a risky commitment.
Brown suggests that going forward the Elgins keep $45,000, or three years' worth of withdrawals, in
money-market and short-term bond funds. He would divide the remaining $205,000 among stock
funds (55%), bond funds (30%) and assets such as REITs that typically diverge from the stock
market's performance (15%). The equity concentration should allow the portfolio to grow. At the
same time, the diversification offers protection during a downturn in any one asset class.
Eileen and Larry Elgin
ENFlELD, N.H.
GOAL
To draw $15,000 a year from their investments for the rest of their lives
WHERE THEY STAND
Total portfolio: $250,000 (withdrawals would be 6% a year)
RECOMMENDATIONS
Keep a high percentage of stocks for growth, but diversify into other asset classes for safety.
WHAT TO SELL, WHAT TO BUY
sell
1. Sell stock funds with expense ratios higher than the category average.
2. Pare back on large-cap growth stock funds, particularly those with overlapping holdings.
3. Jettison two software stocks (Microsoft and Entrust).
buy
* Vanguard Short-Term Bond Index (VBISX)
* Harbor Bond (HABDX)
* Cohen & Steers Realty Shares (CSRSX)
* T. Rowe Price New Era (PRNEX)
* Artisan International (ARTIX)
* Selected American Shares (SLADX)
A mix of stocks, bonds and other assets like real estate and commodities is designed to provide
growth in an up market and protection if stocks take a tumble.
NOTES: [black circle] = MONEY 50 fund. These represent top holdings. Financial planner
Christopher Brown recommends additional funds as well.
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