Investing in the home stretch to retirement

Mark and Linda Paine, ages 51 and 58, are nearing retirement and don't have a high risk tolerance.

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By Josh Hyatt, Money Magazine senior writer

The bulk of the Paines' retirement portfolio is invested in individual stocks that have collectively underperformed the broad market over the past 15 years.
Diversify their mix by gradually shifting money into stock funds but also by investing in something other than domestic blue-chip equities.
With retirement within sight, this move will protect the assets they've spent decades accumulating, while their portfolio continues to grow.
Strategic pics: Dodge & Cox Intl
This low-cost fund, which is in the Money 70, invests in industry-leading companies based overseas, such as Novartis, Nokia and HSBC. Since the Paines prefer bluechip stocks, this portfolio - with around half of its assets invested in Europe - should be a comfortable option.

(Money Magazine) -- With plans to retire in the next five to eight years, Linda Paine knows exactly how much investment risk she can tolerate: zero.

"I like sure things," says Linda, who lives in Cincinnati. This explains why Linda and her husband Mark paid off their 15-year mortgage in a decade's time, why they've squirreled away six months' worth of expenses and why Mark drives a 15-year-old Volvo with 145,000 miles on it.

What it doesn't explain is why half of the couple's retirement savings is invested in individual stocks.

This may be a safe strategy - if you're married to Peter Lynch. But Mark, a manager for the Ohio-Kentucky-Regional Council of Governments, says he has "never gotten an outside opinion."

Linda says her husband "does a real good job at picking the stocks. I don't worry about it at all." But should she start, especially now that the couple have dreams of buying a winter retirement home in Marco Island, Fla.?

Where they are now

Like many couples nearing retirement, the Paines are focused on saving more and investing better. Combined, they earn nearly $105,000 a year.

Mark stows 5 percent of his salary in his workplace retirement account. And with his employer kicking in another 6.9 percent, he has amassed close to $200,000.

Linda, who works as a bookkeeper, isn't eligible for a 401(k)-like plan but has accumulated $26,000 in her IRA.

Beyond that, the Paines have another $300,000 in taxable investments, spread mostly among 30 or so stocks that Mark picked through dividend-reinvestment plans.

His hunt for stocks sold through DRIPs first led him to Procter & Gamble (PG, Fortune 500) in 1992. Since then he has added names like Coca-Cola (KO, Fortune 500) and Anheuser-Busch (BUD, Fortune 500) to his list.

By Mark's estimate, his portfolio generated total returns of about 7 percent a year since he started vs. 10 percent for the Vanguard 500.

What they should do

If their money keeps growing at 7 percent a year for the next eight years, the Paines will have nearly $1 million. At a 4 percent withdrawal rate, the couple can safely tap $40,000 a year, says Cincinnati financial planner Erik Christman.

Even with Social Security, their income would be only two-thirds what they're making now. "They are going to be challenged to retire, even in eight years," Christman says.

To meet that challenge, they need some diversification and help from professional management. A good chunk of the Paines' portfolio is in consumer-product and energy stocks Mark found through DRIPs.

Where there's overlap, the Paines should consider reducing those bets, shifting toward better-performing funds like the Vanguard 500 (VFINX) or American Funds AmCap (AMCPX).

Diversification also means boosting foreign stock exposure through a blue-chip fund like Dodge & Cox International (DODFX).

As for the Florida condo, even if the Paines sold their $300,000 home in Cincinnati - which they don't want to do - they wouldn't have enough to buy the type of second home they dream of, which could easily run $800,000.

A more realistic option, Mark concedes, might be renting a condo in Florida for a few months out of each year. And with retirement within sight, the realistic choice is probably the better one.

Are you on track for an early retirement? Tell us why at Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series. To top of page

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