• Allen, 63, and Bridget, 62, earn around $245,000 a year working as a computer engineer and scientist, respectively.
  • Their retirement accounts are worth about $1.8 million; they each have a traditional IRA , Roth IRA, and 401(k) .
  • Benz said their biggest task for getting on track for retirement is creating a balanced asset allocation, which requires investing their large amount of cash holdings to put their money to work.
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It's crucial to check up on your investment portfolio leading up to retirement .
Married couple Allen, 63, and Bridget, 62, are hoping to retire within the next five years. As part of Morningstar's Portfolio Makeover Week , Christine Benz, director of personal finance at Morningstar, reviewed their investments to assess whether they're on the right track.
Allen and Bridget started saving early, but coming from a family of hard-working immigrants, slowing down in retirement won't be easy, they told Morningstar . Bridget plans to leave her job as a scientist by the time she's 65, while Allen would like to continue working as a computer engineer until age 67. They currently earn around $245,000 a year.
After recently selling their home to downsize, the couple is renting an apartment. They plan to use the proceeds from the sale to buy a new home soon and are holding that money in a taxable account. Their retirement accounts are their largest asset, totaling abut $1.8 million spread across 401(k)s and traditional and Roth IRAs.
Allen and Bridget expect to spend about $120,000 a year in retirement, or much less if they're able to buy a new home outright and eliminate a mortgage payment. If they each start collecting Social Security at their full retirement age , they can bring in about $64,000 in benefits annually. They'll then need to pull roughly $63,000 from their investment portfolio, after factoring in taxes, to make up the difference.
Here's what their investment portfolio looked like before Benz's makeover, shared with permission from Morningstar:
pre retirees morningstar
pre retirees morningstar
Courtesy of Morningstar
Benz said Allen and Bridget's main focus should be creating a balanced asset allocation that allows them to withdraw 3.5% of their portfolio each year in retirement to meet their spending needs. Part of that requires investing their large amount of cash holdings to put their money to work, she said.
With their goals in mind, Benz suggested the following changes to their portfolio:
  • To ensure they have enough cash to buy a new home outright, liquidate two smaller stock investments held in taxable accounts. Keep that cash, along with their emergency fund , in a taxable account with the former home sale proceeds.
  • Invest the cash balance in each of their Roth IRAs in Vanguard's total stock market index fund.
  • Streamline Allen's traditional IRA, the household's largest retirement account. Remove more aggressive fixed-income funds and add in high-quality short- and intermediate-term bond funds.
  • Streamline the holdings in Bridget's 401(k) to just three, including a stock index fund and an international growth fund, to lower costs and get exposure to more high-quality funds.
Here's what their investment portfolio looked like after Benz's makeover, shared with permission from Morningstar:
after_allen and bridget morningstar
after_allen and bridget morningstar
Courtesy of Morningstar
While these changes to Allen and Bridget's portfolio are essential to getting their nest egg in shape for retirement, Benz noted that it may be too risky to shift their investments all at once.
"My bias would be to not try to time the changes perfectly but rather dollar-cost average into a more fully invested position over the next few years, after they've determined how much they'll need for their new home," she said. "Dollar-cost averaging guarantees that their timing in putting the money to work won't be exactly correct, but nor will it be exactly wrong."
Benz also suggested the couple look into long-term care insurance . If they decide not to buy a policy, she recommends separating those costs out from their other annual spending estimations and preparing for them accordingly.
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