By Donna Rosato, Money Magazine
senior writerJanuary 6, 2010: 6:26 AM ET
(Money Magazine) --- Richard and Cheryl Ebers began their married life
together just nine years ago. She was divorced and raising two sons
(now adults); he was a widower with a young boy of his own (Eric, now
13 ).
Richard was a diligent saver from way back, regularly socking away
money in his 401(k) and consistently putting away $500 of Eric's
monthly Social Security survivor benefits for his college fund.
Cheryl admits to being a spender previously, but has since zeroed out
her credit card debt and opened her own IRA. "Being married to Richard
has made me more conscious about saving," she says.
Together they now have almost $500,000 for retirement, and $39,000 for
Eric's college education. But while they keep shoveling money in, they
rarely revisit their investment decisions. "I haven't made any changes
to my portfolio in 10 years," says Richard. As they start closing in
on their retirement and Eric's high school graduation, they're
wondering whether they still have the right mix.
The couple's set-it-and-forget-it strategy is especially dangerous in
such a volatile market, says Portland planner Tim Kober. Because of
their inertia, the Eberses are now 84% in stocks, far too aggressive
for their ages. Another market crash could devastate their retirement
dreams, which include Richard's building an airplane and taking flying
lessons. (As is, in a more appropriate 60%/40% allocation, they'd have
lost roughly 22% in 2008 vs. the 30% or so they did.)
Counting Richard's modest pension, Kober estimates that the Eberses
need $1.4 million to maintain 80% of their current income once they
retire. Assuming a 6% average annual return - on a more conservative
portfolio - they can get there at their current rate of savings
($12,000 a year). But they must be sure to ratchet down risk as they
age, says Kober. Eric's college fund should cover a chunk of his
education, the planner adds, but this too needs monitoring.
*CURB RISK.* The Eberses should reduce their equity allocation to 54%
and boost fixed income to 40%, focusing on investment-grade bonds,
Kober says. By retirement they should be 55% in bonds.
*MIX IT UP.* The Eberses are mostly in large-cap U.S. funds. To
diversify, Kober suggests they put 24% in international funds like
Vanguard FTSE All-World ETF (EFV), 5% in the Vanguard Small Cap Value
Index (VBR) and 6% in a REIT fund.
*REVISIT REGULARLY.* The couple need to rebalance at least once a year
to stay on target. They should take advantage of automatic rebalancing
offered by Richard's 401(k).
*KEEP COLLEGE FUNDS SAFE.* The college kitty is 100% in stock funds;
but with Eric now 13, the Eberses should begin dialing back equities
to 50%. By the time Eric is 18, the mix should be 60% bonds/40% cash.
For new savings, they could join Oregon's Vanguard 529 plan, and
choose an age-based portfolio, which automatically makes such
transitions.
Source: CNN.Com
