Q: I am 67 years old and retired. I am trying to build a simple portfolio that I can use for the next 20 to 25 years. I am looking to put my money into index funds and to rebalance yearly.

Just wondering if this makes sense: Fidelity Spartan Total Market Index Fund, 40 percent; Fidelity Spartan International Index, 20 percent; and Fidelity Spartan US Bond Index, 40 percent.

All investments would be in their very low-expense Advantage shares.

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A: Yes, it makes sense. What you are proposing is to use the major homegrown index funds at Fidelity to build a traditional balanced, 60/40 equities/fixed-income portfolio at very low cost.

By reducing domestic-equity holdings from 60 percent to 40 percent and substituting 20 percent international equities, you are getting some diversification that you would otherwise not have.

That said, the portfolio would still be considered a U.S.-centric portfolio since domestic equities are overweighted relative to developed country international equities.

Will it be a top-of-the-scale, world-beating portfolio?

No, but its very low expense level will put the performance wind at its back. With an average expense just under 0.10 percent, most of the return on your money will be going in your pocket.

One advantage you will enjoy by managing your own portfolio of three funds is that you’ll be able to make annual rebalancing buy-and-sell decisions that will help you avoid selling depressed assets at low prices.

Q: I have often read that one should withdraw only 4 percent, or less, from savings to avoid running short in old age. My question: Is that net percentage after investment earnings are figured in, or should earnings be ignored?

A: It’s all about principal, not earnings.

The famous 4 percent figure is drawn from research on safe withdrawal rates done by financial planner William Bengen. He found that you could have a starting rate of 4.3 percent from the total value of a typical balanced portfolio. You could then increase that original dollar amount by the rate of inflation each year. If you did that, you would have a very high probability of not running out of money for 30 years.

It’s also important to understand that this is not the last word on withdrawal rates.

Additional research over the last 15 years has suggested that withdrawals could be higher if you had some simple spending rules.

Other research has suggested that high-valuation markets — such as the one we are now in — require a lower initial withdrawal rate.

Whatever the research suggests, however, the withdrawal rate was a starting percentage of the original portfolio. In your case, it would have been 4.3 percent of the value of your portfolio on Dec. 31 of the previous year.

And here’s where there is a problem. If the year-to-date difference of $11,479 between what your portfolio earned, $133,742, and what you withdrew, $145,221, is about 0.7 percent of your portfolio, your portfolio should be about $1,640,000. If so, a 4.3 percent starting withdrawal rate would be about $70,500, not $145,221.

The combination of a relatively conservative portfolio and required minimum distributions turns out to be a very good simple tool to avoid going broke.


Copyright 2014, Universal Press Syndicate