Design an investment portfolio for success

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Whether you triumphantly attain retirement or have it forced upon you by life circumstances, a large amount of savings will be required to carry you through those nonworking years. For best results, those savings should have been carefully cultivated in an investment portfolio throughout the working years.

Retirement is when investing gets particularly tricky because the portfolio that brought you to the retirement party won’t be the one taking you home.

Near-retirees and those already in retirement need to engineer their investments to mitigate factors that can lead to portfolio failure.

A successful retirement portfolio is one that outlasts you — or at least lasts as long as you do. A portfolio failure means you’ve run out of money before you’ve run out of life.

Factors that contribute to portfolio success or failure include:

The withdrawal rate

To fund 30 years or more of retirement, a person should have saved, at minimum, between six and 10 times their annual pay, ideally within tax-favored accounts.

Before divvying up the pot of money into asset classes, the first step is to determine the amount of income needed from the portfolio on an annual basis.

Ideally, the amount needed annually should not exceed about 4 percent of the portfolio. Past research has suggested that a withdrawal rate of 4 percent every year is generally considered to be safe. Subsequent research has pegged the safe withdrawal rate somewhat lower, but the 4 percent rule of thumb persists.

Recent simulations run by Manoj Athavale and Joseph M. Goebel, professors at the Miller College of Business at Ball State University, found that a 4 percent withdrawal rate for 30 years resulted in portfolio failure 14 percent of the time. When the withdrawals spanned a 35-year period, the failure rate increased to 18 percent. If your income needs exceed about 4 percent of the portfolio per year, an aggressive investing strategy may be able to make up for some savings shortfalls, but miracles and the stock market do not generally go hand in hand.

Asset allocation and investing strategy

Even in trying to make up for a savings gap, retirees and people close to retirement shouldn’t invest as heavily in stocks as they did during their working years. In fact, they should move to limit their exposure to the stock market to a certain extent.

“If someone is only going to work for 10 or 12 years (before retiring), there are a finite number of years in which we could recoup the volatility in a portfolio. We might start with a portfolio that has as much as half of the assets in fixed income and half in the equities,” says Dan Yu, managing director of EisnerAmper Wealth Advisors in New York City and lead retirement expert.

Over time, the effect of market volatility can be pernicious in a retirement investment portfolio without a strategy to deal with it.

“Let’s say a retiree has 60 percent in fixed income and then 40 percent in equities in a hypothetical $2 million account, and the equity markets drop 20 percent. The client is down $160,000 on the equity side of his portfolio. On the fixed-income side, the $1.2 million in fixed income probably went up by 4 percent. So the true loss, because the client is a diversified investor, is really more like $110,000,” Yu says.

Yu’s plan of action after a big drop like that would be to sell bonds that have done well and buy more equities. He would also ask the client to take out less money that year and pay himself or herself back down the road.

Withdrawal strategies

Withdrawals from retirement investment portfolios need to be highly strategized and planned in advance. Haphazardly selling investments that are down to scoop out funds will undermine the longevity of your portfolio.

Just as workers should rebalance to their ideal asset allocation in the accumulation phase, retirees need to keep an eye on their asset allocation and stay close to their plan. In addition to selling assets that have done well and buying more of the losers, retirees will also harvest some of those gains to go into their shorter-term money earmarked for spending in the near future.

Many financial advisers recommend using a bucket system to illustrate the tiered system of long-term versus short-term investments. Cash and cash equivalents would account for most of the money to be spent in the near future — that can be anywhere from the next six months to the next five years.

“When the markets are doing really, really well, you want to whisper in the client’s ear, ‘Let’s just take a little bit off and put that into fixed income. So you can go spend it.’ I want to control when I sell and not be forced to sell in a down drop,” says Yu. “That’s why it’s so important to put the heavy lifting upfront in designing a portfolio, investment statement and investment strategy and then sticking to it with conviction.”

Dr. Gregory W. Kasten, CFP and CEO of Unified Trust in Lexington, Ky., uses buckets for his clients with the front bucket representing spending cash for the next five years.

“Let’s say I need $50,000 to fund the next five years. When I go through the first year, I’ve taken out one year of $10,000 and have four years left. But I’m always trying to keep five years of very conservatively invested income in front of the client,” says Kasten.

“I would then look at stocks and bonds and replenish that bucket with whichever investment did the best over the past year — selling high in other words,” he says.

His own research has found that pruning the winning investments to fund income needs can improve the survivability of a retirement investment portfolio by 10 percent to 18 percent.


If you think market volatility will be the main culprit in weakening your investment portfolio, think again. Inflation will eat its lunch.

A paper by Rick Wurster, asset allocation portfolio manager at Wellington Management, detailed simulations comparing the portfolio of someone retiring in 1929, the beginning of the Great Depression, to someone retiring in 1966, the beginning of the Great Inflation, a massive inflationary era that spanned two decades.

Titled “DC 20/20: Bringing the Key Drivers of a Secure Retirement Into Focus,” Wurster’s paper states, “The individual who retired during the Great Inflation had about 70 percent of the value of his or her savings wiped away over the course of 16 years by inflation alone and, as a result, ran out of money early.”

Meanwhile, the 1929 retiree’s investment portfolio provided more purchasing power as a result of three years of early deflation, ultimately resulting in portfolio success despite the stock market’s dramatic fall.

The best assets for fighting inflation will be equities, but a diversified portfolio should have a smattering of all the inflation-fighting asset classes, including Treasury inflation-protected securities, or TIPS, and commodities.

Yu recommends energy, general commodities and some precious metals as inflation fighters — but don’t go overboard.

“(You don’t want) a lot at that point in your life. You don’t want all that much volatility. In those three baskets together, maybe 5 (percent) to 6 percent of the overall equity portfolio is there,” he says.


Taxes are a largely unavoidable expense, but their impact can be mitigated with a little strategizing.

Generally speaking, one of the best ways to reduce your tax bill in retirement is with a Roth IRA or Roth 401(k). With a Roth account, taxes on contributions are paid upfront. The contributions and all of the earnings are tax-free when you take withdrawals in retirement.

But there are other ways to limit your tax liability in retirement. One is by paying attention to the types of investments held within a taxable brokerage account as opposed to a tax-favored account such as a traditional IRA, a Roth IRA or a 401(k).

For instance, stock mutual funds could be an important source of growth in retirement, but mutual funds can incur capital gains for investors when investments within the fund are sold. These gains may occur when the fund experiences losses and are beyond the control of fund investors.

“In an IRA you can afford to have capital gains come off, and you can afford to have interest that’s not tax-free, so you can afford to have taxable bonds that might have a higher rate of return because you’re not being taxed until you take a withdrawal,” says Lynn Mayabb, CFP, senior managing adviser of BKD Wealth Advisors in Kansas City, Mo.

Conversely, using tax-efficient investments, such as municipal bonds, ETFs or index funds, in a taxable brokerage account would be more wallet-friendly than more taxing investments when it comes time to pay Uncle Sam.

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