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Prepare Your Portfolio for Retirement

By Elizabeth Leary
Kiplinger's Personal Finance

Once you reach your final five years in the workforce, you should begin shifting your portfolio toward the types of investments you'll hold in retirement. Start to bring your asset allocation in line with your anticipated retirement portfolio; by this stage, you should lower your allocation to stocks to roughly 60 percent. Our suggested portfolio also includes a 10-percent allocation to Pimco Income, a more-aggressive bond fund, and Vanguard Short-Term Investment-Grade, a conservative fund that invests in government debt and investment-grade corporate bonds.

You should also begin to build up positions in the income-generating investments that will become your bread and butter in retirement – such as T. Rowe Price Dividend Growth and a fund that invests in real estate investment trusts. If you want to pay for a complete financial plan only once in your life, this is the time to do it. Perhaps you now own a large enough portfolio that you qualify for free or discounted advice through your online broker (although many robo advisers offer advice, we don't think they are yet up to the task of singlehandedly planning your transition into retirement). If you want to find someone unaffiliated with a large firm, go through a fee-only network, such as NAPFA (www.napfa.org) or the Garrett Planning Network (www.garrettplanningnetwork.com).

Whoever you choose, do your homework. Check your adviser's record with regulators. For brokers, that means searching on the Financial Industry Regulatory Authority's BrokerCheck website (https://brokercheck.finra.org). For investment advisers, that means checking with the Securities and Exchange Commission (https://adviserinfo.sec.gov). Ask whether your adviser is legally required to act in your best interests, or if he or she may simply recommend investments that are suitable for you. Finally, be sure you understand how an adviser gets paid.

Suggested Retirement Portfolio

35 percent: Schwab Total Stock Market Index (symbol SWTSX) or ETF alternative: Vanguard Total Stock Market (VTI)

10 percent: Vanguard Total Intl Stock Index (VGTSX) or ETF alternative: Vanguard Total International Stock (VXUS)

10 percent: T. Rowe Price Dividend Growth (PRDGX) 5 percent: Fidelity Real Estate Index (FRXIX) or ETF alternative: Schwab U.S. REIT (SCHH)

20 percent: Metropolitan West Total Return Bond M (MWTRX)

10 percent: Pimco Income D (PONDX)

10 percent: Vanguard Short-Term Investment-Grade (VFSTX)

When Munis Make Sense

Our portfolios include only taxable bond funds. However, if you are a high earner, you might be better off with municipal bonds for fixed-income holdings in taxable accounts. Consider Fidelity Intermediate Municipal Income (FLTMX). Its 1.6-percent yield is equivalent to 2.8 percent from a taxable bond fund for someone in the top, 43.4 percent federal tax bracket. A good choice with less sensitivity to rising interest rates is Vanguard Limited-Term Tax-Exempt (VMLTX); it yields 1.1 percent.

Editor’s Note: Elizabeth Leary is a freelance contributor to Kiplinger's Personal Finance magazine, www.Kiplinger.com.


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