QUESTIONS & ANSWERS
As retirement nears, it's time to pare stock holdings
By Kenneth Hooker, Globe Staff, 08/16/98
Q. I am 64 and my wife and I are retired. We own our home, no debts, and have fixed expenses of $16,000 a year. Income from Social Security and a pension is $36,000 a year. I have a total of $306,000 in IRA accounts, of which $256,000 is in stock mutual funds and $50,000 in a zero-coupon bond maturing in 2000. My wife has various investments totaling $100,000 in mutual funds, savings bonds, and bank savings. Since I have no plans to withdraw any of the investments before the mandatory age of 72, when should I plan to reinvest into a more conservative portfolio, and what should the portfolio consist of?
D.E., Bristol, N.H.
A. There's no time like the present. Even though you can afford to take a long-term view of the market, holding more than 84 percent of your portfolio in stock funds at this point is far too aggressive. I find no fault with your fund choices - the largest holding is $58,000 in the excellent Legg Mason Value Trust, followed by holdings of $25,000 in Fidelity Growth and Income, and $24,000 in Vanguard Index 500. But I calculate that more than 75 percent of the fund portfolio is dominated by large-cap stocks - the very market segment that is now stumbling.
Even if you decide to stick with such a stock-dominated portfolio, I suggest you seek more diversification. For example, you have $18,000 each in Vanguard Growth and Income and Vanguard Windsor II, both of which have large-cap, value-oriented portfolios. Swap one of these positions for something such as Vanguard Small-Cap Index.
But more important than diversifying within the various sectors of the stock market is diversifying beyond stocks. I suggest that about 25 percent of the current stock fund portfolio be moved to the fixed-income side, to build a bond portfolio consisting of about 50 percent in a GNMA fund, and 25 percent each in a short-term bond and a high-yield (or junk) bond fund.
One final thing: you're a little optimistic about when you'll need to begin taking mandatory distributions from your IRA accounts - the rules require that the first distribution come by April 1 of the year following the year when you reach age 70 1/2.
Q. We would like to start our 14-year-old grandson in investing his money - birthday gifts and so forth. Should he do a CD or some mutual funds? What is the best place for his small amount of savings? We have investments with Fidelity. What type of investment might our 19-year daughter make?
P.H., Lynn
A. The answer depends on another question - when are your grandson and daughter likely to use the money? If he's likely to go on to a secondary education in about three years, there's no question that CDs would be far better than most mutual funds; even funds at the more cautious end of the spectrum, bond funds and the like, can be quite volatile over a three-year time frame, even though long-term records seem stable.
But let's presume that both your grandson and daughter won't be using the money right away, perhaps letting it grow until they are in their late 20s and are thinking about making their first home purchase. In that case a mutual fund would be a good choice. With such a time frame, I'd suggest an investment such as Fidelity's Puritan fund, which holds about 63 percent of its assets in stocks and the rest in bonds and other fixed-income securities. It's been one of Fidelity's stronger funds in recent years (relative to its objective) and has a good record of weathering sour markets fairly well.
The only potential bug is the Puritan requires a minimum initial investment of $2,500, even for a uniform gift to minor's account. They do allow a $1,000 minimum for custodial accounts in Fidelity Asset Manager, which is roughly similar, but which hasn't done as well historically as Puritan. So a solid strategy, if the minimum deposit is an issue, might be to begin with CDs and then move into a mutual fund once the account reaches the required level.
Q. I will be 67 next January, and I am beginning to taper off working as a temporary employee. I have started drawing Social Security, but have to return most of it because of my earnings. My monthly benefit from Social Security is now $1,287. From the following portfolio, where should I begin drawing funds to bring my monthly income up to $3,000? I have $193,800 in IRAs, $69,700 in common stocks, $29,500 in money markets and CDs, and a variable insurance policy with a $12,700 cash value.
R.P., San Marcos, Calif.
A. In the best of all possible worlds, what you would be looking for is at least a 6.72 percent return from the total portfolio, which would allow you to make the monthly withdrawals of $1,713, with no loss of principal. If you judge by the stock markets of the past few years, that would seem like falling off a log. But when you have a sequence of unusually strong years for stocks, it's most likely that what will follow is a sequence of so-so or horrible years. So a 6.72 percent average seems a bit more dubious in the short term.
A good deal of the IRA portfolio is well-chosen for income - Cohen and Steers Realty fund, Equity Residential Property Trust (a NYSE REIT), Janus Flexible Income fund, and Lindner Dividend fund all sport solid yields. Dodge and Cox Balanced, at 3.1 percent, also has a respectable yield for the current market. But the dividends are minimal for Hotchkiss and Wiley International, Neuberger and Berman Guardian, and Vanguard Index 500, the last of which is your largest single holding.
My suggestion would be to reduce your positions in those final three funds from the current total of $77,600 to about $40,000, diverting the proceeds to a pure fixed-income fund such as Janus Flexible Income or Vanguard GNMA. I would tentatively suggest similar moves within the common stock portfolio, which is dominated by telephone issues, providing that there would be no horrible tax consequences.
Where should you draw the money once you have tapered off from working? If you expect to have some earned income during 1999, it would make sense to draw from the taxable accounts, calculating that in subsequent years your taxable income will be lower, and thus you will be better off waiting to withdraw from the IRA until you have little earned income.
Kenneth Hooker will answer selected investors' questions in the Sunday Mutual funds and Monday Money sections. Send letters, including your name, address and telephone number, to: Kenneth Hooker, The Boston Globe, Boston, Mass. 02107-2378.
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