Money Makeover: Reach goals with less risk

Joe and Amy Powers can shift to a lower-risk portfolio and still easily meet their retirement goals.

By Amanda Gengler, Money Magazine writer-reporter

NEW YORK (Money Magazine) -- Joe Powers takes a methodical approach to life. Two years ago, when he decided to look for a new job, he embarked on an exhaustive search to find the perfect one.

To keep tabs on his investments, he tracks the performance several times a week of the 40 or so individual stocks that he and his wife Amy keep in a brokerage account.

"He researches endlessly and considers every angle," says Amy, 37, a former teacher who is now a stay-at-home mom.

Now Joe, 39, who recently started his new job as a plant manager at a company that makes fuel for wood-pellet stoves (yes, he says, it is perfect so far), is turning his attention to detail on his family's long-term goals: paying for college and retiring comfortably when he is 65.

"I want to look at the big picture," he says. "What should we be doing?"

Where they are now

Good thing he asked: Right now the Powerses' big picture is filled with risks. Between Joe's 401(k), their IRAs and taxable brokerage accounts, their portfolio is about 92 percent invested in equities. The couple also have a $200,000 balance on an adjustable-rate mortgage at an interest rate of 5.63 percent.

It's up for readjustment in three years, which could add hundreds of dollars to their monthly payment.

And they've got almost no cash to fall back on: After their stove, refrigerator and septic tank went bust in the past two years, they were forced to drain their savings accounts to $9,000.

On the plus side, the couple carry no debt besides the mortgage and have $30,300 in college savings accounts for six-year-old Victoria.

What they should do

The Powerses can easily protect their mortgage payment from future interest-rate hikes, says financial planner Regina Ballinger of Wellesley, Mass., by locking in a fixed rate.

They could get a 30-year fixed-rate loan for their remaining loan balance at today's rate of about 6 percent without increasing their monthly payments.

Then they should take the following steps:

Prioritize retirement savings Joe should roll over his $100,000 401(k) from his former employer and combine it with his current rollover IRA. Once he's eligible for his new company's 401(k), he ought to contribute at least 6 percent of his $90,000 salary, enough to get the full company match.

Since the couple's income qualifies them to make Roth IRA contributions (a modified adjusted gross income under $166,000), they should also set up a monthly $125 Roth IRA automatic deposit.

"If they do this they'll be on track to reach their retirement goals," says Ballinger. She calculates that their portfolio will likely grow to about $2.5 million by the time Joe hits age 65.

Once they've maximized retirement contributions, they should aim to add $125 a month to the 529 account. If Amy returns to work, her income can help fill the gap for college costs.

Shed individual stocks Ballinger recommends the couple cash in their entire brokerage account. "These are far too many holdings for Joe to monitor," she says. "He does not have the time, access to research or a clear plan about when to buy and sell."

They will see about $17,000 in capital gains and owe $2,500 in capital-gains tax. Joe should funnel $21,000 of the proceeds into an online savings account.

They can add that to their current cash savings to establish a $30,000 emergency fund to cover six months' worth of living expenses.

Add some bonds With more than 25 years until retirement, the Powerses can afford to take investment risk. But Ballinger thinks their current 92 percent equity holding takes it too far.

Based on their answers to a risk-tolerance questionnaire, she found that the couple would find it hard to handle dramatic fluctuations in their portfolio.

A well-diversified mix made up of 75 percent equities and 25 percent fixed income and cash, Ballinger says, will give them plenty of growth and a much smoother ride.

She also thinks that the couple have too many large-cap growth stocks. Adding to their small-cap and international holdings should help prevent steep losses, since those stocks tend to move out of sync with large-cap growth equities.

Get enough insurance Since Joe is the single earner in the family, Ballinger says they must buy disability insurance.

In addition, both of the Powerses need bigger life insurance policies. To get more coverage at a lower cost, she suggests the couple dump their $520,000 term and $230,000 whole life policies and buy a $1 million, 20-year level-term policy for Joe and a $500,000 term policy for Amy. Those will cover them until Victoria finishes college.

Switching to term insurance will save Joe and Amy about $1,500 in yearly premiums even with the higher death benefit. They can put that extra cash toward Joe's disability policy.

After listening to Ballinger's advice, Joe still isn't sure if he wants to scale back his stockholding to 75 percent. But he isn't at all unhappy. "It was a pleasant surprise," he says. "We can take on less risk and still hit our retirement goals."

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.