From: "Chris Cowles"
Newsgroups: misc.invest.financial-plan
Subject: Need review/advice for savings plan
Date: Thu, 1 Jun 2006 15:55:08 -0500
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I'm hoping to get an objective analysis of my long-term financial plan. I
feel rather odd publicizing my personal finances but there's no other way I
can think of to get meaningful assistance here.
I'm basically looking for 2 kinds of advice:
1. Are my projections even slightly realistic? I think so, but would
appreciate corroboration.
2. My investment strategy is generally asset allocation with occasional
rebalancing. New retirement contributions effectively follow dollar-cost
averaging. What should the asset allocation be?
Background:
We're a family of four. I (husband) am 50, my wife is 46. We have combined
gross salaries of $125,000/year, split approximately evenly. Both our jobs
are relatively secure and we both enjoy higher-than-inflation annual raises.
I expect those to last several more years before leveling off to approximate
COLA. Our health is decent, and we have good health insurance that's cheap.
(We work in healthcare.) We both plan to retire at age 67 and assume Social
Security benefits will be reduced by 50% of our current estimated benefit.
If either of us lost our current jobs we could readily find new jobs, but
at some loss of income or satisfaction. We both have short- and
long-term disability plans at work. In addition, I have a private LTD plan I
purchased when in a job where one was not provided. I'm still carrying
it but reduced the coverage to 50% of salary. I hold it as a hedge in case I
lose my current job, and am uninsurable at that time. (No reason to think
that will happen.)
We both have $250K 30-year term life insurance costing <$400/year, each. The
intent of that is to pay off the mortgage and fund the kids' college. If
both of those are taken care of, the surviving partner easily could manage
remaining expenses with their single income.
We have 2 month's liquid cash on hand, assuming we both lost our incomes and
did not reduce our expenses. Because that combined circumstance is highly
unlikely, I consider it to be closer to 4 month's cash needs. That also does
not take into account our employability if not disabled, and our short- and
long-term disability plans. While it's not the '6-month cushion' advised by
the most conservative writers, I think it's okay. We won't starve and, in
worst case, have lots of open credit and family not far away.
In recent years my employer switched from a defined benefit to defined
contribution pension with 2 components. One is a basic 403b with a 75% match
up to 4% of my salary, which I'm contributing. It's managed by Lincoln
Alliance and has decent investment choices. It has a current value of
~$18K.
The other component of my pension plan is a guaranteed interest fund over
which I have no control. My employer contributes 4% of my salary and the
interest rate is set annually. I believe it's a little over 4% right now. In
2009, the contribution rate increases to 5%.
Because I was in the class of 'older workers' when they made the plan
switch, they're making an extra 5% contribution to compensate for my losses,
relative to a defined benefit pension. That extra contribution stops in
2012. (I'm likely to look for alternative employment at that point.) The
balance of the 'cash' fund is ~$29K.
My wife works for HCA and gets a 50% match on 401k contributions, up to 3%
of salary. She contributes 3%. In addition, HCA contributes 5% of her gross
salary per year into a 'Retirement Fund' mutual fund that could be described
as 'balanced'. The combined value of her holdings in the HCA plan is ~$36K.
In addition to the 401k and the profit-sharing contributions, she also
contributes 10% of her salary to HCA's ESPP. The benefit of that is the
minimum 15% price discount at the time the stock is granted. Not wanting to
hold the stock, we sell it immediately and the discount is taxed as ordinary
income. The result is effectively a 1.5% boost in salary, sometimes more.
(The discount is 15% off the market price at the lower of either the
beginning or end of the accrual period.) The money goes mostly back into our
operating income.
>From previous jobs and savings, we have retail and rollover IRAs with a
combined value of $38K, 2 Roths each with a value of ~$6K, and a 403b with a
value of $28K. All are held at Fidelity. We've each been contributing $2K
annually to the Roths for the past few years and plan to continue.
Our home is conservatively valued at ~$325K with a mortgage of $145K. We
have additional unsecured debt totaling $30K, at 3.99% fixed interest. That
was rolled over using a cash advance on some credit cards, from a recent
new car loan and a HELOC used for big-ticket home repairs. I'm paying
$700/month, with an expected payoff date of 11/09.
We have 2 kids, in 4th and 7th grades. Neither have known health problems
that could cause unusual expenses. We expect both to qualify for good
universities. I'm committed to providing them a free ride at an in-state
public university (in Florida), including on-campus room and board (or the
equivalent). If they get accepted to an out-of-state or private university,
the source of cost difference is up to them to find. I also expect them to
contribute to minor expenses through summer and/or college jobs
I plan to fund the education with second mortgages or HELOCs. I'll sell the
current house when my the younger one enters college, buying a smaller one
valued at around $200K in today's market. Proceeds from that sale will pay
off existing mortgages (of course) and subsequent college loans will be
secured by the smaller home. Over a series of years in retirement, we'll
trade down a few times (not flipping houses), paying off small mortgages and
ending up in a small condo valued at approximately $65K, paid in cash. I
base that value on my parent's condo in West Florida.
I've used the Lifetime Planner in Microsoft Money to model this plan and it
seems to work. I've tried to include foreseeable events like buying cars for
the kids, college, big ticket homeowner items, and significant increases in
medical costs in older age. I have not included long-term care. The model
assumes current returns of 8% and post-retirement returns of 6%. Including
increasing retirement contributions after our kids are out of college, it
projects we'll have ~$500K in assets at our projected death at age 92 and
age 90 for my wife. I don't care if I leave my kids a dime, but don't want
to end up eating Alpo, either.
As stated above, I'm basically looking for 2 kinds of advice:
1. Is this projection even slightly realistic? I think so, but would
appreciate corroboration.
2. My investment strategy is generally asset allocation with occasional
rebalancing, and dollar-cost averaging with new retirement contributions.
What kind of allocation is advised for someone in my position, considering
that I don't plan to pay for college (relatively short-term) with my
investments?
In answering the last question, consider that ~$45K is outside my control -
$30K is in a guaranteed interest cash fund and $15 is in a ~'balanced'
mutual fund. $21K is in my wife's 401k with somewhat limited investment
choices. $18K is in my 403b with a broader array of choices.
Should I consolidate my Fidelity 403b into my IRAs or consolidate them into
our current employer plans? Should I convert the IRAs into Roths? I don't
have much cash on hand that I want to spend on the taxes, in that case. One
sense I have is that Fidelity's not cheap. My 403b fund with them is largely
invested in an S&P500 index fund, which charges $24/year in addition to
whatever expenses are buried in the fund itself.
Thanks in advance for all well-intended advice. The time you spend helping
is greatly appreciated.
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