Christine Benz, director of personal finance and retirement planning at Morningstar, has outlined a series of steps for individuals to review their investment portfolios. She recommends completing the process over multiple sessions rather than all at once.
The first step involves gathering documentation such as current investment statements, Social Security information, and pension details. Benz suggests setting up a My Social Security account for an overview of benefits and earnings history.
Step two requires assessing progress toward financial goals by reviewing current portfolio balances and savings rates. A baseline savings rate of 15% is mentioned, with higher-income individuals advised to aim for 20% or more. Other goals like college funding or home down payments should also be evaluated for realism, ensuring retirement planning is not neglected.
For those retired or nearing retirement, the viability of a financial plan is gauged by the withdrawal rate—planned portfolio withdrawals divided by total portfolio balance. The 4% guideline is cited as a starting point, with lower rates recommended if possible.
Step three involves checking long-term asset allocation to ensure the mix of stocks, bonds, and cash matches targets. High-quality target-date series from Vanguard and BlackRock's LifePath Index Series are referenced as benchmarks. Benz notes that portfolios heavily weighted toward stocks are suitable for younger investors, while those within ten years of retirement should consider shifting to bonds and cash, mindful of tax consequences.
Assessing liquid reserves is step four. Holding cash is described as crucial to avoid tapping investments or using credit cards during financial difficulties. Retired individuals are advised to hold six months to two years' worth of portfolio withdrawals in cash, while those still working should aim for three to six months' worth of living expenses.
Step five focuses on suballocations, sector positioning, and holdings. While broad asset-class exposure largely determines portfolio behavior, positioning within each class is also important. Recent market strength has broadened, but growth stocks and related funds have significantly outpaced value stocks over the past decade. Checking sector positioning, foreign stock allocation, and actual holdings is recommended.
Step six identifies opportunities to streamline portfolios. Consolidating multiple accounts, such as 401(k)s and rollover IRAs into a single IRA, is suggested. Index funds, ETFs, and target-date funds are mentioned as tools for providing diversification with fewer holdings.
Managing for tax efficiency is step seven. When making changes, tax and transaction costs should be considered. Selling within tax-sheltered accounts is advised to avoid tax costs, while taxable accounts require reviewing tax implications before trading. Contributions to tax-sheltered vehicles and holding equity ETFs or municipal bonds in taxable accounts are noted as strategies for tax efficiency, along with considering withdrawal sequencing.
Step eight addresses other risk factors, including uninsured long-term-care risk for those not well-off or eligible for Medicaid. Developing a plan for potential long-term-care expenses is recommended. Another common risk is providing financial help to loved ones; consulting a financial advisor or estate planner is suggested to avoid jeopardizing one's financial future.