Value Added
The Right Formula for Retirement
It's no secret. First, determine the best proportions for your portfolio. Second, pick the best funds.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
February 17, 2004
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Retirement is the main goal for which most of us invest. Fortunately, it's fairly easy to put together a good portfolio of funds for retirement if you know the right formula.
It's no secret. A successful retirement portfolio relies more on how your assets are allocated than on picking individual mutual funds. The most important thing to remember is to make sure you invest enough in stocks.
Investors more than five years from retirement shouldn't put more than 10% or so of their money in bonds. Bonds historically have averaged a 5% annual return before inflation. Stocks, on the other hand, have historically averaged a 10% annual return.
Five or more years to go
If you invest mainly in a 401(k) plan or 403(b) plan at work, you're limited to the funds within your plan. But that doesn't limit your ability to put together a solid, well-diversified portfolio.
If you have five or more years to go before retirement, a good portfolio mix would be:
- 20% of your assets in a large-company growth fund
- 20% in a large-company value fund
- 25% in a small-company stock fund
- 25% in an international stock fund
- 10% in a high-quality, intermediate-term bond fund
The idea is to put your nest eggs in several different baskets by investing in funds that buy stocks in companies of different sizes. Also try to divide the stock portion of your portfolio between funds that look for growing stocks and those that try to buy stocks at a discount, otherwise known as value funds. For more on these distinctions, see Diversify Your Fund Portfolio.
If you're investing on your own, either in a self-employed retirement plan or through an IRA, I would specifically recommend the following funds:
- 15% TCW Galileo Select Equity I (TGCEX), which invests in stocks of large, fast-growing companies
- 15% Oakmark Fund (OAKMX), which invests in undervalued stocks of large companies
- 20% Legg Mason Opportunity (LMOPX), which invests in stocks of all shapes and sizes
- 20% Masters' Select International (MSILX), a broad-based foreign fund with multiple managers
- 10% Third Avenue Real Estate Value (TAREX), which invests in companies involved in real estate
- 10% Merger Fund (MERFX), which seeks to profit from the gains to be made in already announced mergers and is less risky than many bond funds
- 10% Harbor Bond (HABDX), an intermediate-term bond fund
Fewer than five years to go
If you're within five years of retirement, you should tone down your risk a bit by converting more of stock holdings to fixed-income assets. The following portfolio is more conservative:
- 15% Brandywine Fund (BRWIX), which invests in medium and large-size companies with growing earnings
- 20% Oakmark Fund
- 10% Third Avenue Small Cap Value (TASCX)
- 15% Masters' Select International
- 10% Merger Fund
- 10% Fidelity Real Estate Investment (FRESX), which invests in high-yielding Real Estate Investment Trusts
- 20% Harbor Bond
In retirement
Finally, if you've already retired, I'd still urge you not to skimp on stocks. Odds are you'll live decades in retirement. I'd keep 60% of your money in stocks or stock funds and put the rest in bonds or bond funds:
- 10% Brandywine Fund
- 15% Oakmark Fund
- 5% Third Avenue Small Cap Value
- 5% Masters' Select International
- 10% Merger Fund
- 10% Fidelity Real Estate Investment
- 10% Fidelity Floating Rate High Income (FFRHX), which invests in short-term, secured bank loans
- 35% Harbor Bond
You can withdraw 5% annually from this kind of portfolio -- plus, make sure to increase your withdrawals each year by the previous year's inflation rate.
When you reach age 65, consider selling most of your bond funds and putting the proceeds into an immediate fixed annuity, which will guarantee you a monthly payment for the rest of your life. To learn about immediate fixed annuities, read "Income Forever" in the March issue of Kiplinger's Personal Finance.
