Retiring at 60 is doable, but it will require ramping up retirement savings -- which Linda has already taken steps toward doing -- and maintaining that discipline in the years to come. For diligent savers like Linda and Pete, this is likely to be as routine as getting out of bed in the morning.
Start by maxing out Pete's 401(k) and Roth IRAs for Linda and Pete every year. But don't stop there. To retire before age 59½ -- not currently in the cards but something that could change -- they'll need to accumulate more assets in the taxable portion of their portfolio. Though they've never used a budget, instituting a way to track monthly income and expenses could help them maximize their savings opportunities outside of retirement accounts. Paying off the car loan in another year will add significantly to the amount they can regularly invest.
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With the exception of Pete's rollover IRA that has been sitting in cash, they've done a decent job of diversification. However, there are some holes in the allocation which can be fixed with the balance in Pete's rollover IRA and their upcoming IRA contributions.
Let's begin with Pete's 401(k), which is currently invested only in a midcap value fund. A more appropriate asset allocation, especially since he'll be adding to this account on a regular basis, would be to select a target retirement fund. One of the target retirement options in Pete's 401(k) has an investment mix of 70 percent stocks, 30 percent bonds and cash. This allocation is appropriate for their ages, goals and investment horizon.
Applying that same 70 percent equities, 30 percent bonds asset mix to their entire retirement portfolio means using the cash balance in Pete's rollover IRA to shore up some areas of their equity allocation and build up the bond portion of their portfolio. At this point, they don't have a need for cash investments in their retirement accounts.
Specifically, they should pare back the midcap exposure by half and achieve the desired small-cap exposure when Linda makes her 2007 IRA contribution to one of her existing small-cap funds. They should raise the allocation to large-cap domestic stocks to 37 percent of the portfolio from the current 21 percent.
On the international front, they have enough exposure to emerging markets, but are significantly underweighted in developed markets. The worldwide equity fund they have is only 56 percent international, so they don't have the overseas exposure that meets the eye. Devoting 18 percent of their assets to stocks in international developed markets is an appropriate allocation.
On the fixed income side, they might consider allocating 15 percent of the portfolio to an aggregate U.S. bond index, 10 percent to international bonds, and the remaining 5 percent to a high-yield bond fund.
One final big-picture item is the need to have adequate life insurance protection until the kids are grown and out of the house. The current policies will expire while the kids are still in high school. They will need coverage to extend until the children are grown, but won't need as large a policy to cover those last few years a decade from now as what they currently have in place.
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