Much too young to play it safe

Mindy and Brad Reese: Fairview, Tenn. Ages 34 and 38

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(Money Magazine) -- There is nothing remotely fuddy-duddy about Mindy and Brad Reese.

The outgoing Mindy, 34, is a realtor by day and a part-time actress and model on the side. The affable Brad, 38, is a personal trainer who co-owns two upscale gyms in Nashville. Yet if you knew this couple only by their portfolio, you'd place them somewhere between Wilford Brimley and Betty White on the excitement scale.

Currently, nearly half of the $200,000 the Reeses have saved sits in a money-market fund earning a mere 3.1%. And it's not just because of the current market. The fact is, Brad and Mindy haven't been comfortable taking investment risk.

"We never felt we understood stocks, bonds and mutual funds well enough," says Mindy. Yet there's no way they'll achieve their ambitious goals - which include retiring in their late fifties - unless they invest in long-term assets like equities.

Where they are now. On paper the Reeses should be well on their way to a comfortable retirement. The Tennesseans, who live in Fairview, a rural community near Nashville, earn about $145,000 a year. That's a considerable sum for a childless couple with no debts other than a $315,000 mortgage.

And unlike other couples their age, the Reeses save aggressively - they're now putting away nearly $40,000 a year.

As for the mortgage, it's held against a 2½-story, $450,000 house, which they built a year and a half ago, shortly after getting married. Though this was supposed to be their dream home, the Reeses are now looking to move closer to Nashville, where they both work. The 40-minute commute each way has gotten to be too much.

They're in no rush to sell in today's housing market, so they're confident that with patience they'll recoup their original investment - and then some.

What they should do. Start to think long term. Brad admits: "The $80,000 in cash is pretty dumb. We didn't have the confidence to put it all in." Of course, the recent gyrations in the market don't make the Reeses any more sanguine.

But Robert Bolen, a financial planner in Brentwood, Tenn., says the couple have to think about how stocks will perform over the next 20 years, not the next 20 days. They have plenty of time to ride out the short-term bumps they will almost certainly encounter. And the recent market downturn simply means "you're buying stocks on sale," he says.

Still, psychologically it might be easier for the Reeses to dollar-cost average into the market in eight monthly installments of $10,000. This ensures that they'll never put all their long-term money into stocks on the worst possible day.

Diversify their portfolio. Before they move into the market, the couple need to decide what's the right mix of stocks and bonds to hold. Bolen recommends that the Reeses put at least 70% of their money in stocks (with the remainder going into bonds).

If Brad and Mindy can stomach it, they could increase that to 85%, Bolen says. But the couple might not be emotionally prepared for that much exposure, especially in a choppy market.

To build their portfolio, he'd put large stakes in international stock funds (30%) such as Allianz NFJ International Value (AFJDX) and in large-cap U.S. stock portfolios (20%) like Fairholme (FAIRX), with the rest divided between small-cap and midcap funds. A portfolio invested in this manner would have returned 12.9% annually over the past decade vs. 4.1% for a portfolio invested only in blue-chip U.S. stocks.

Create a long-term savings plan. "The first thing about saving and investing for retirement is to have a picture of what you want that life to look like," Bolen says.

With the traveling that Mindy wants to do, Brad's desire for a golf club membership and basic living expenses, the Reeses figure they'll need around $75,000 in annual income in retirement.

To reach their goal, Bolen says, the couple should consider saving $50,000 a year - or $10,000 more than their current pace. By doing so they could amass more than $3 million in 20 years, assuming an 8% annual return. Even at a more conservative 6% growth rate, they're still likely to earn enough to generate sufficient income.

Mindy says she's comfortable with these targets. "We're blessed with making $145,000 when most people don't make that much," she says. But, she adds, "I'm not jetting off to Paris just yet."

The makeover

• Problem #1: The Reeses have nearly half of their long-term savings sitting in a money-market fund earning just 3.1%.
• The plan: Invest at least 70% of their savings in stocks and the remaining 30% in bonds.
• The payoff: A portfolio that is largely in equities has a better chance of growing at a rate faster than inflation.
• Problem #2: The money that they currently have in stocks is overly concentrated in big U.S. companies.
• The plan: Shift Leah's account into CDs and bonds.
• The payoff: This way a bear market in U.S. blue chips won't sink their entire portfolio.
• Problem #3: The couple aim to retire in their late fifties, an ambitious goal.
• The plan: Set aside $50,000 each year in their 401(k)s, IRAs and taxable accounts.
• The payoff: Even if they earn a modest 6% a year, they'll still reach their retirement goals.

Worried about your investments? Get a makeover from Money Magazine. E-mail us at makeover@moneymail.com.