Richard, a college professor in Mississippi, and his wife are both age 54 and would like to retire in 10 years.
Their investments: "I'm a good saver," he says. He certainly is, contributing the maximum of $22,000 to his 457 plan, and putting the maximum of $6,000 each year into both of their Roth IRAs. He's been a consistent contributor to the 457 plan and has funded the IRAs for the past 15 years. Assets among those three accounts total more than $550,000.
With regular investments dating back to his 20s and 30s, Richard also accumulated a sizable taxable portfolio totaling $585,000, more than half of which is invested in eight equity mutual funds. Included in the taxable portfolio is a collection -- and I do mean a collection -- of 31 individual stocks that he bought when very young. Of those 31 holdings, 16 have balances less than $2,500, including three that are worthless and seven with balances below $500. One position alone, AT&T at over $100,000, constitutes 17 percent of the taxable portfolio. Any slump in that one position could impact his ability to retire early.
The emergency fund: The family has six months' worth of expenses in a high-yield savings account and another $10,000 in a high-yielding CD -- both found on Bankrate.com. This represents the only cash holdings in a portfolio that is otherwise all equities, with no bonds or commodity exposure.
Their home and kids: Richard and his wife own their home, valued at approximately $150,000, free and clear. An auto loan with $10,000 remaining is the household's only debt. Credit card balances are always paid in full, using rewards cards he also found on Bankrate.com.
Richard has never utilized 529 college savings plans or Coverdell accounts for his children's college education. Those expenses have been funded for his older child strictly from earnings thus far, and he plans to do the same for a second child entering college in the next two years. Richard intends to help his kids all the way through college, and he is in the fortunate position of being able to do so. The almost immediate need for undergraduate funds would not give his money the necessary time to compound on a tax-free basis in order to offset the management fees in a 529 college savings plan. But if his children have graduate school ambitions, then it's worth considering opening a 529 plan.
Their future: In retirement, both are in line to receive pensions, Richard's to the tune of about $38,000 annually while his wife will receive about $500 per month from a previous employer. At full retirement age, their total Social Security benefits of $3,520 per month, coupled with their pensions, will provide more than 80 percent of their current pre-retirement gross income.
Their retirement goals are very modest, with Richard indicating a desire to travel, perhaps taking "one major trip each year." They'll probably stay in the same home, but there is a possibility of moving to another state, perhaps to live in a university town with lots of cultural events to choose from.
- Portfolio consists entirely of equities.
- Emergency savings is the only cash component.
- Taxable portfolio contains 31 different stocks.
- Allocation is out of whack, even within equities.
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