Mid-career: Reduce retirement plan risk

Problem The Morrows say they have a moderate appetite for risk, but the couple is investing 100 percent of their retirement portfolio in stocks. Makeover Shift 25 percent of their $255,000 retirement account into bond funds. Payoff A 75 percent stock/25 percent bond allocation will limit short-term market losses but will be sufficiently aggressive to grow their investments for the long term. Strategic pick: Fidelity U.S. Bond Index The Morrows have zero exposure to bonds. But through a low-cost index fund like this, the couple can invest in a safe, diversified mix of high-quality corporate and government bonds that should satisfy their fixed income needs.

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Money Makeovers:

1. Twentysomething: Start out strong
2. A thirtysomething's search for financial security
3. Mid-career: Reduce retirement plan risk
4. The home stretch to retirement
5. Retired - and ready to play it safe

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(Money Magazine) -- Like many parents with young kids, Steven Morrow is breathing a little hard these days.

The respiratory therapist wonders how he and his wife Haley will be able to cover the costs of college for their son Taylor, 7, and their daughter Madison, 5.

And like other boomers, Steven is starting to think about retirement. Despite their age difference, Steven and Haley want to retire within a few years of each other.

While this gives the couple plenty of time to save, Steven is scared they'll come up short.

He's so worried, in fact, that despite the unrest in today's stock market, he's thinking about tapping their home equity - he paid $225,000 for a Ventura, Calif. home now worth $600,000 - to invest more in stocks.

"I have nearly half a million dollars in my house and it's not doing anything for me. It's just sitting there," he says.

Steven and Haley need to take a deep breath, says Leon Rousso, a financial planner in Ventura.

In addition to the obvious risks involved with betting your home equity on stocks, it's simply unnecessary to be this aggressive, Rousso says. For starters, Steven and Haley, a registered nurse, both have pensions.

In addition, they have $255,000 amassed in their tax-deferred retirement portfolios. So they're on track to retire comfortably, especially if they keep putting 17 percent of their $160,000 combined income into their 403(b) plans, Rousso says.

The couple's real problems lie elsewhere. The Morrows say they aren't big risk-takers. Yet for some reason, they have all their money invested in stocks.

It gets worse: Even though they're at a stage in life when emergencies are bound to come up - what with two kids and two careers - Steven and Haley have no emergency fund.

That is, unless you count the $1,000 in their bank account, another $1,000 stashed in the closet in an "earthquake fund" and a jar full of coins.

Plus, they're taking on debt. The balance on their home-equity line of credit: $85,000 at 7 percent interest.

Steven and Haley need to add some ballast to their portfolio.

"They are moderate risk-takers, and they may not be able to stomach losing their equity in the markets," Rousso says.

A better mix would be 75 percent stocks and 25 percent bonds, he says. They can get there by adding some decent bond funds to their mix, like Fidelity U.S. Bond Index (FBIDX). At the same time, the Morrows also need to start an emergency cash fund - stat!

"They're so focused on getting a high return on their retirement, but they let their cash languish in jars around the house," Rousso says. It's time to put that money to work in a high-yielding bank account.

Since the Morrows don't have much time to think about putting money away, they should start an automatic savings program with their bank to help them stay disciplined and amass the $20,000 they need to cover three months of expenses.

Steven is also paying $116 extra a month on his mortgage in hopes of paying it off quickly. But since the loan is locked in at a low 4.75 percent, Rousso says Steven should redirect the cash to the kids' 529s, which currently have a balance of just $18,000. As for the HELOC, Steven pays $1,000 a month on the debt.

For now the minimum payment is about half that, which gives the Morrows' budget some wiggle room.

But the sooner he pays off the line of credit, the more cash he'll have to apply toward other goals, like investing for the future - without going into debt.

Are you on track for an early retirement? Tell us why at millionaire@cnnmoney.com. Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series.