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Retirement
A money makeover at 55
December 21, 2000: 8:17 a.m. ET

Reallocating assets to better preserve capital and yield a steadier return
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - Like many folks in their mid-50s, Darlene Bishop has had a few jobs in her career and a paper trail of retirement plans to prove it.

In addition to her current, newly opened 401(k) to which she will contribute $5,250 per year, she has a 401(k) with a former employer, two rollovers, a traditional IRA and a taxable mutual fund account.

Bishop, a 55-year-old administrator at a Detroit-based manufacturer, wants to better harness her money for maximum return, particularly since she wants to retire in five years and the biggest portion of her $91,000 portfolio is sitting in Scudder funds that have been mired in the red.

Déjà vu ... everywhere

The real problem, financial experts say, is not so much that she has a large percentage of her money in one fund family, but that the investments across her entire portfolio largely duplicate one another in terms of style and holdings.


graphicPortfolio Rx is a regular 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.


More than half of her money is invested in Scudder Growth & Income and Large Company Growth funds; Vanguard's Windsor II, Wellington and Total Stock Market funds; as well as shares of AT&T, Lucent and Compuware.

With this combination of funds and stocks, "she's got duplication and concentration big-time," said certified financial planner Chris Cooper of Columbus, Ohio.

As things stand now, more than 80 percent of her portfolio is invested in large-cap U.S. stocks and only 7 percent in bonds and cash.

In terms of sectors, Bishop has about 32 percent of her money in technology and 18 percent in health care. That's too much on both counts, said CFP Bryan Lee of Garland, Texas, given that her portfolio is too small to have such substantial portions tied to any one segment of the market.

Among their recommendations, Cooper and Lee suggest Bishop first sell her individual stocks and consolidate all her money into one custodial account, which will make it easier to track and easier to determine her minimum required distributions when the time comes.

Know thyself

What's more, Lee said, she should allocate her money keeping in mind how much she will realistically need in retirement income. "She needs to be less return-focused and more goal-focused," he noted.

graphicOutside of the money her portfolio will yield, she and her husband, Bill, 61, expect to receive about $3,600 a month in pre-tax dollars from Social Security and pension income.

But that may not be enough to support their current lifestyle. Bishop estimates her monthly expenses total $3,000 after tax, but Cooper and Lee suspect they are much higher, given that she and her husband have a combined $100,000 gross income but only $3,000 in cash savings. The fact that the couple also have a $60,000 home equity loan on top of their $100,000 mortgage is also of concern, the planners said.

"They seem to be spending every dime they take in," Cooper observed. That means that her portfolio will have to yield a sizeable portion of their retirement income.

If Bishop works until she's 65 and her husband, who plans to retire in three years, continues to work part-time for spending money, her portfolio can yield substantially more assuming a 10 percent average annual return, Cooper said.

If she retires at 60, however, they might risk going into debt since she will not qualify for her $1,000-per-month Social Security payment until she turns 62, he cautioned.

Spread the risk

Even though Bishop describes herself as a moderately aggressive investor and the planners agree she should have substantial stock exposure given her long time horizon in retirement, they both said she should increase her bond investments to do a better job at preserving what she's got.

"She can't afford to lose the principal," Cooper said.

That's why he recommended she put 35 percent of her money in bonds; 33 percent in U.S. large-cap growth stocks; 17 percent in U.S. large-cap value stocks; and 15 percent in non-U.S. stocks.

graphicOne way to achieve that balance, he said, is by investing 25 percent of her money in each of four Oppenheimer funds: Main Street Growth & Income, Global, Capital Income and Champion Income.

Oppenheimer funds tend to offer consistent performance for less risk and volatility than many of their competitors, Cooper said.

Lee wanted Bishop to have more exposure to mid-caps and small-caps as well, suggesting she invest 10 percent of her money in each. In addition, he urged her to put 30 percent in large-caps, divided evenly between growth and value stocks; another 15 percent in international stocks; 30 percent in bonds; and 5 percent in cash.

Because of their low expenses and broad index approach, he suggested a number of Barclays Global Investor iShares, including the S&P 500 BARRA Growth and BARRA Value funds, as well as the S&P Mid-Cap 400 and Small-Cap 600 funds. For international exposure, he likes Harbor International or Barclays iShares S&P Europe 350. And for bonds, he thought she should keep her current investment in the Vanguard Long-Term Corporate Bond Fund, but also add the Vanguard Short-Term Bond Fund to her portfolio.

Be strategic, not aggressive

Since Bishop has five separate accounts that she'll need to consolidate, they caution that reallocating her assets may not be something she can or should do overnight.

That's particularly the case when it comes to her taxable mutual fund account, where she has $15,000 invested in Vanguard Health Care and Vanguard Wellington funds. The goal is to strategize when to sell in order minimize her capital gains hit, they said.


Click here to read last week's Portfolio Rx. And be sure to have a look at this week's CNNfn.com column Checks and Balances.


Since both planners would like to see her increase her emergency fund by at least another $6,000, she might do so by selling off small portions of her taxable funds at a time and put that money into her cash savings, Cooper said.

But he also recommended keeping a tighter rein on her budget and detailing her monthly expenditures to get a better handle on how much she will really need in retirement.

Cooper recommends clients plan to take out no more than 8 percent of their portfolio per year in retirement; Lee suggests no more than 5.5 percent. But for a portfolio to yield that comfortably and still grow there needs to be enough of a steady return and a cushion built in to protect against market volatility. Bishop still needs to do more work to build up that cushion, which is why the planners suggest she postpone retirement for at least a few years.

Assuming an average annual return of 10 percent, her $91,000 portfolio plus $5,250 annual contributions to her current 401(k) would give her a $179,000 nest egg five years from now, Cooper said. If she waited 10 years, that number jumps to $320,000.

The goal, he stressed, is to strategize, not gamble with her money. "She'll have to work to 65 to make this work," Cooper said. "Being aggressive with her investments is not the solution."

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. graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.