Money Makeover: The right risks for retirement

Jen and Alix Leon know what they want retirement to look like. To get there, they need to take smart risks with their money - and stop taking bad ones.

By Josh Hyatt, Money Magazine senior writer

NEW YORK (Money Magazine) -- Like most 19-year-olds, Jennifer Leon took a job to help save extra money for a secret splurge. Unlike her peers, though, her splurge was retirement. "I could already see myself older, stepping out of my beach house and right onto the sand," says Jennifer, who worked as a bank teller back then.

Now a small business owner and a 35-year-old mother of two, she remains committed to that vision. "Jen lives for the future," says Alix Leon, 31, her partner of seven years. "I'm the one who lives for the day."

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The Leons: Jen, Riley, Alix and Olivia (from left to right)
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Jen, owner of a mortgage brokerage in Portland, Ore., is so anxious to get to the beach that she occasionally skips ahead. In February she almost bought a $275,000 lakefront home where she and Alix could retire in 25 years. "With a second child coming," she says, "I suddenly felt like I had to get everything in place."

That wasn't the only time she went into future shock. Hyper-aware that she was missing out on a bull market, she recently told a financial adviser to buy stocks with the $240,000 in a rollover IRA that she had parked in short-term investments. She lost $15,000 in three days, and now the money is back mostly in cash, earning a measly 4 percent. "You can't always see the future," she admits.

Where they are

Alix serves as full-time mom to Rylie, 3, and three-month-old Olivia. Jen leaves a good chunk of her company's earnings in the business and pays herself about $72,000 a year. That funds their household expenses of $4,800 a month. Jennifer has $100,000 in taxable savings accounts and can count on a small pension from the bank where she worked.

Alix, a schoolteacher, plans to return to the classroom in two years. She figures that over a 30-year career she can build a retirement kitty of $350,000. "I'm not concerned about having enough to live on," she says.

Jen worries enough for the two of them. They put just $100 a month into college savings. And they bought a $750,000 house last year and have an interest-only ARM that resets in 2012, meaning their monthly mortgage tab of $2,500 could spike up. "No wonder I have these mini heart attacks," says Jen.

What they need to do

Jennifer has been diligent about saving money, but she and Alix need to add risk to their portfolio, and take it out of the rest of their lives.

Invest smarter. Financial planner Phyllis Carlton of West Linn, Ore. suggests that Jen move her IRA into either a retirement fund with a target date of 2030 or a simple combination of six Money 70 funds (see the portfolio to the right).

These low-cost funds will provide enough exposure to stocks. The target-date fund requires virtually no maintenance. Its asset mix will grow more conservative as Jen gets older. She'll also save the 1.5 percent annual fee she's been paying a planner.

Redirect their savings. Given the profitability of Jen's company, she can put $14,000 a year into what's known as a SEP-IRA and another $4,000 into a Roth IRA. She can also invest $10,000 into each child's 529 plan. Doing so will effectively allow her to convert taxable savings into tax-deferred accounts. They can keep an emergency stash of $30,000.

Protect the kids. The couple have $1.5 million of insurance on Jen but none on Alix. They should spend about $500 a year to get her $500,000 worth of coverage. Otherwise, "Jen would end up depleting her retirement savings for child care," says Carlton.

What if both parents died? As a same-sex couple, they need to have wills that spell everything out. Carlton wants them to bulk up their college savings when Alix returns to work.

Reduce interest-rate risk. The Portland real estate market has proved resilient, and the couple's home has increased in value. Still, when their mortgage resets they could see their payments skyrocket. Without Alix's income they won't qualify for an attractive loan, so they should look to refinance once she's earning money again.

"They have taken on big interest-rate risk," warns Carlton. Jennifer, a bit uncharacteristically, says she isn't worried: "I'll get us a good deal. After all, I am in the business."

Want a Money Makeover? E-mail us at: makeover@moneymail.com.  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.