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Family friendly funds
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July 12, 2001: 5:02 p.m. ET
A couple with three children plan for college tuition, an early retirement
By Staff Writer Alexandra Twin
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NEW YORK (CNNfn) - Eleven years ago, David and Linda Winter began two of the biggest projects of their lives: They started a family and they started investing.
The parents of three daughters and the owners of a diversified portfolio worth more than $140,000, the Winters are happy with their accomplishments, but they also would love to retire early and they are concerned that they may have started investing too late.
Linda, 42, left her $80,000-a-year job to begin a law practice specializing in condominium construction litigation, which she runs with a partner. David, 44, earns $120,000 a year as a vice president of business development for a consulting firm.
The Winters have IRAs and joint accounts totaling $40,000 and they have more than $100,000 in David's 401(k).
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Madeline, Linda, Emily, David and Lauren Winter (left to right) | |
They have $50,000 life insurance in cash accounts on each of their daughters and $500,000 in term insurance on David and $250,000 in term insurance on Linda.
They are expecting a check for stock options in the next six months and Linda may receive settlement funds for a case she is working on and hopes to settle over the next two-to-three months. With these funds, they plan on adding to their existing $2,000 money market account, bringing it up to $25,000. They'd like to open three 529 college savings plans for the girls and put $5,000 into each.
The three children each have about $10,000 in trust accounts with Putnam Voyager A (PVOYX: Research, Estimates), thanks to their grandparents.
Lauren, 11-1/2, likes to draw, paint, and play the piano. Seven-year old Emily is interested in math, science, and sports. Four-year old Madeline loves to swim.
The family's Seattle home has a great view of the ferry dock, but Linda can also picture a beach house on the Oregon coast someday. She and David would like to retire by 60 at the latest and play golf and go out to dinner as often as possible, but for the time being, they'll settle for remodeling their house and expanding their kitchen.
They started investing when David got a bonus at work and have done so consistently in the ten years since then. They use dollar-cost averaging to contribute to their portfolio. They have about $14,000 in credit card debt, as well as a mortgage and second home equity loan.
They prefer mutual funds in general, and Linda jokes that this is probably a good thing because their two attempts at picking individual stocks – Drugstore.com (DSCM: Research, Estimates) and Flakey Jake's – didn't turn out so well.
Portfolio Rx is a CNNfn.com feature that looks at issues like portfolio diversification and asset allocation. In each article, we review a reader's investments and ask financial experts for advice.
Ditch debt, plan for emergency
Dee Lee, a certified financial planner in Cambridge, Mass., and the author of "Let's Talk Money," said that Ms. Winter is probably right. "Their portfolio is not large enough to support individual stocks. They're better off sticking to funds right now."
Lee also suggested that they use the extra money coming in from the settlement and the stock options to start a separate retirement plan for Ms. Winter. She might want to consider a SEP-IRA or a Keogh, as she and her husband have between 20-to-25 years to increase their retirement savings.
When you are in business for yourself, sometimes getting paid can be slow going. To counteract this, Lee suggested that Ms. Winter start an emergency fund of at least six months worth of living expenses set aside as a cushion.
Bill Lane, a certified financial planner from Stamford, Conn., and the current president of the Financial Planning Association in Connecticut, suggested that they need long-term disability coverage on both partners and malpractice coverage for Ms. Winter's law practice.
In Lane's view, the Winters should also boost their money market fund, as Ms. Winter suggested, and max out Mr. Winter's 401(k).
While the life insurance on both parents is ample, both planners question the need for $50,000 cash value life insurance on the three children and suggest that this money would be better put to use in a college fund.
Both Lee and Lane like the 529, as it allows withdrawals – starting in 2002 – to be used free of federal income taxes for college expenses.
Even though he likes the Putnam Voyager fund, Lane suggested that they may want to take the girls' trusts and transfer them into the 529 plans.
Most important, they need to get rid of their credit card balance and other debt before they get more aggressive with their investing.
"They need to review their cash flow," Lee said. "Where is the money going each month? With a combined income of $200,000, they should be able to pay off the debt before the extra money starts to flow in to savings."
Lane's Rx
Assuming a non-excessive lifestyle, it's reasonable to expect some discretionary investable income every year, Lane said.
He suggests that any future investing be put into Roth IRAs, pointing out that "the tax deduction they give up now will look like peanuts compared to their tax-free distributions at retirement in 25 years or so."
While Lane thinks Mr. Winter's 401(k) represents some good choices, he also suggested that he may want to halve his commitments to Alliance Technology (ALTFX: Research, Estimates), Alliance Premiere Growth (APGAX: Research, Estimates), Janus Worldwide (JAWWX: Research, Estimates), and his Index 500 fund.
Mr. Winter also may want to reallocate these funds to small-cap and bond asset categories. "Neuberger Berman Genesis and the Bond Fund of America are holding their own in this very difficult market," Lane said.
In terms of their joint portfolio, Lane said that there are some excellent funds in the current lineup, but some are only average or below average performers over time.
In rounding up their current lineup, the Winters have approximately 15 percent in large-cap growth, 24 percent in large value, 35 percent in mid-cap growth, 10 percent in technology and almost 20 percent in sectors.
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Lane also suggested they switch out of large growth funds like Alliance
Premiere Growth and Putnam Growth Opportunities (POGAX: Research, Estimates) and consider small cap offerings such as Fidelity Low-Priced Stock (FLPSX: Research, Estimates), Royce Micro Cap (RYOTX: Research, Estimates), Neuberger Berman Genesis (held in David's 401k), or Wasatch Small Cap Value (WMCVX: Research, Estimates), all run by managers who have proven their skill over time.
Give up Putnam Growth & Income (PGRWX: Research, Estimates) in favor of the mid-cap value offering Oakmark Fund (OAKMX: Research, Estimates) (Oakmark Select is closed). The T. Rowe Price Mid-Cap fund the Winters should keep, Lane said.
The Winters may want to consider moving their health sector exposure from Invesco (FHLSX: Research, Estimates) to Vanguard's Health (VGHCX: Research, Estimates) fund for better performance and lower costs.
For tech, Lane suggested they keep their Alliance fund and sell Kinetics Internet (WWWFX: Research, Estimates) on any bounce, "like now!" Use some of that Web money for more on the financial services front, by adding to the John Hancock Regional Bank (FRBAX: Research, Estimates) fund. They may also want to switch their money out of Invesco Energy (FSTEX: Research, Estimates) and into the John Hancock fund.
"Energy as a sector has some rough times ahead and the Invesco fund is only an average performer in that sector," Lane said. "Other appealing prospects for their financial services exposure are Fidelity Select Insurance Fund (FSPCX: Research, Estimates), which has been a storm shelter over the years, and Pilgrim Bank & Thrift Fund (PBTAX: Research, Estimates)."
While neither planner has seen the Winters' kitchen and are therefore unable to discuss renovations, both planners agree that the Winters' finances are in good shape and due for expansion. And part of planning for this expansive future means that when the Winters are done reassessing their investment landscape, they may want to start tracking a different horizon, namely, the one along the Oregon coast.
If you would like to be considered for our Portfolio Rx feature, send an e-mail to mailto:retirement@cnnfn.com with the following information: Your full name, age, location, occupation, income, assets, debt and expenses, your retirement goals, such as when you wish to retire and what type of lifestyle you envision. Also include specifics about your long-term savings portfolio: your 401(k) and IRA accounts; which mutual funds, stocks and other securities you own; and information about any other source of retirement income you expect, such as a pension. Please include a daytime phone number so that we may reach you. If we choose your portfolio, we will use your information, including your full name, in an upcoming story. 
* Disclaimer
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