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Looking for 'safe' 7% return
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October 31, 2000: 7:40 a.m. ET
Fidelity portfolio overhauled to generate steady return with less risk
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - Gisela Heun is used to making things grow. The proud owner of 30 acres of land that she likens to a nature preserve, Heun has spent years tending to the Michigan property, planting evergreens, spruces, pines, birches, beeches and oaks. It is where she and her husband live and plan to spend their retirement.
But her green thumb has not been enough to combat the downturn on Wall Street, particularly the Nasdaq, on whose fate a chunk of her portfolio is closely tied. Her 401(k) and 403 (b) accounts, which combined had been worth $500,000, lost $30,000 in value by the end of September. Given her plans to retire next year at age 57 and start drawing $35,000 annually from the pool, that was more downside than she cared to stomach.
 "I don't want to engage in high risk anymore," said Heun, who is winding down a 30-year career as a university administrator.
Heun would even consider having a bond-dominated portfolio if that meant she could generate a "somewhat safe 7 percent return" every year and be "protected from the market's mood swings."
But planners say she shouldn't become that conservative just yet, given her long time horizon in retirement. However, they suggest ways she can generate better-than-7-percent returns while in some instances reducing her risk.
Making back the $30K
Heun, planners say, has done a good job of saving so far. Her overall portfolio currently totals $705,000. In addition to her 401(k) and 403(b) accounts, which hold $470,000, she also has a $220,000 TIAA-CREF annuity fund and $15,000 in U.S. savings bonds.
She plans to draw solely from her 401(k) and 403(b) funds until she is 59-1/2, at which point she will reduce her withdrawal since she will begin to receive $24,000 a year from her annuity. When she turns 62, she will receive about $1,200 a month in Social Security, and plans to leave as much invested in the markets as possible.
 Portfolio Rx is a weekly CNNfn.com feature that looks at issues of portfolio diversification and asset allocation. In each article, we review an investor's investments and ask financial experts for advice. If you want help with your nest egg, see below for more information.
Heun's top priority right now is to make back her $30,000 to get the combined balance in 401(k) and 403(b) accounts up to $500,000 by the time she retires. Her plan choices are limited to Fidelity and TIAA-CREF funds, but Heun has decided she will stick with Fidelity for now.
Currently, she contributes 5 percent of her $66,000 salary to the accounts and her employer contributes 10 percent. The money is invested identically in both vehicles: 40 percent in Fidelity Freedom Income, a domestic hybrid fund heavily weighted toward fixed income; 20 percent in Fidelity Puritan, a large-cap value fund; 20 percent in Fidelity Blue Chip Growth; 10 percent in Fidelity Over the Counter, a mid-cap growth fund; and 10 percent in Fidelity Diversified International.
At the very least she is considering selling the tech-heavy Blue Chip Growth and OTC funds, which have been toiling in the red.
That's a move certified financial planners Mary Mahoney of mgm Ltd. in Albuquerque, N.M., and Bill Lane of Austin Associates in Stamford, Conn., applaud. They also both like her allocations in the Puritan and Diversified International funds. But beyond that, they recommend different solutions to help Heun attain her goal.
Most of the gains for less risk
The good news is Heun, without doing a thing, is likely to generate more than the 7 percent per year she seeks, Mahoney said.
Using returns from the indexes that most closely mirror the funds Heun currently owns, Mahoney projects that Heun's 401(k)/403(b) portfolio is likely to return an annual 8.74 percent on average for the next five years. But the actual portfolio may do better since the funds she owns are actively managed, and indeed thus far she has been getting returns of between 11 and 14 percent a year, Mahoney said.
 Twenty-nine percent of Heun's assets are invested in technology, which brings her portfolio more or less in line with the S&P 500. "But given her concerns about volatility, that's too much," Mahoney said.
So she proposed changes that would cut Heun's technology exposure nearly in half while boosting her health care and services exposure by a few percentage points.
Recommending an overall asset allocation of 52 percent stocks, 43 percent fixed income and 5 percent cash, Mahoney suggested that, in addition to her investments in Puritan and Diversified International, Heun put about 34 percent of her money in Fidelity Dividend Growth, a large-cap fund invested in reasonably priced growth stocks, and 28 percent in Fidelity U.S. Bond Index.
The new portfolio, Mahoney said, is projected to deliver average annual returns of about 11.5 percent, but for 30 percent less risk than her current holdings. That potentially it would allow Heun to walk away from her job with a balance as high as $524,000.
But Mahoney recommends Heun not sell her positions in Blue Chip Growth or OTC until the market picks up, since they are down for the year. At the very least, she should sell when the Dividend Growth and U.S. Bond Index funds are down a bit so that the move would be a lateral one.
A 70-30 proposition
Although Lane believes Heun can afford to be 100 percent invested in stocks and make her money back in time, he recommended she put 70 percent of her 401(k)/403(b) money in stocks and 30 percent in bonds because of her aversion to too much volatility. Only when she reaches her mid-60s does he recommend she boost her bond exposure to 40 percent.
 He would like her to maintain some direct exposure to the technology and health care sectors, however, since "they're going to be driving forces of our economy," he said. Accordingly, he suggested devoting 10 percent of her money to Fidelity Select Technology and 10 percent to Fidelity Select Healthcare.
In place of Fidelity Blue Chip Growth, he recommended Fidelity Growth Company; and in place of Fidelity OTC, he suggested the mid-cap fund Fidelity Value. He also suggested she reduce her holding in Fidelity Freedom Income, a hybrid fund heavily weighted toward fixed income, from 40 percent to 30 percent.
Eye expenses closely
But before Heun rejiggers her asset allocation, Lane recommends she maximize her contributions to her 401(k) and take advantage of any catch-up provisions in her 403(b) to put away the most money she can now.
One of his concerns, he said, is that she underestimating how much she spends -- $2,000 a month by her calculation, or $24,000 a year. Given her $66,000 salary, the fact that she has little in the way of a liquid savings account, Lane questions where the rest of her after-tax money goes.
"She should keep a tight book on everything she spends to get a real good fix on where her money is going," said Lane, president-elect of the Connecticut chapter of the Financial Planning Association.
Click here to read an earlier Portfolio Rx. Or, click here to read this week's
Checks and Balances.
As things stand now, Mahoney calculates that Heun should be able to generate $35,000 in after-tax dollars plus a 2 percent cost-of-living increase every year in retirement. She even believes Heun will be able to put $185,000 toward a second home in Florida if she chooses and still be left by age 83 with close to $1 million, albeit not adjusted for inflation.
But all that presumes Heun sticks closely to her $35,000-per-year plan. If it turns out she spends more than she thinks, she might need to draw more from her accounts in the early years of retirement than she anticipates. If she does, that might hamper the growth in her investments long-term, Mahoney said.
A world of options
That's why she and Lane recommend Heun keep in mind some money-making alternatives should she need them. For instance, her hobby of spinning wool for knitters could bring in enough cash to fund an IRA or allow her to withdraw less from her investments in the early years of retirement.
Her property might also generate income. Heun is considering leaving the property to a land trust. That would allow her to continue to live there but get a break on property taxes and sell if she wanted, but only if the new owners promised not to develop the land. That arrangement automatically reduces the market value of the property. If she needed cash, however, another alternative might be to sell three or four acres for development at a higher price and leave the rest of the estate to a trust, Lane said.
Fortunately for Heun, she does have some breathing room in that she has no debt, no children, no dependents and no specific wishes to leave anyone a big inheritance. That her university will pay for her and her husband's health and long-term care insurance for life is another big plus, Mahoney said.
Like other diligent nest builders nearing retirement, Heun's greatest safety net may be that she has many viable options available to her should life take an unexpected turn.
If you would like to be considered for our Portfolio Rx feature, send an e-mail to retirement@cnnfn.com with the following information: your age, occupation, income, assets, debt and expenses, your retirement goals, such as when you wish to retire and what type of lifestyle you envision. Also include specifics about your long-term savings portfolio: your 401(k) and IRA accounts; which mutual funds, stocks and other securities you own; and information about any other source of retirement income you expect, such as a pension. Please include a daytime phone number so that we may reach you. If we choose your portfolio, we will use your information, including your name in an upcoming story. 
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