When Loyalty Runs Too Deep
With the prospect of two pensions, the Herberts can load up on stocks. Just not a single one.
By Stephen Gandel

(MONEY Magazine) – Page and Tamara Herbert dream of retiring to a lake house on Vancouver Island, Canada, where Page can cook his famous barbecued brisket and Tamara can pursue photography. They calculate they'll need $100,000 a year to live on, but Page, a senior data analyst at energy giant ConocoPhillips, says he'll walk away at age 65 no matter what he's saved. "I am a realist," says Page, 45. "Whatever we have by then will be fine."

Indeed, the Houston couple, who together make $125,000 a year, do have a lot to look forward to, most notably two generous pensions. Tamara, 40, has taught school in the same district for 17 years. As long as she works until age 53, which she plans to do, she can expect a pension of as much as $45,000 a year. Page, a 20-year Conoco veteran, stands to collect a pension too. Their biggest problem is the way they are investing to make up for what their pensions won't cover. Also looming: the risk that sending five kids to college will derail their retirement plans.

Where They Are Now

Even with the demands of a big family, Page saves 10% of his pay in his 401(k), with Conoco matching the first 9.25%. But much of the $217,000 he's built up is going nowhere fast. Half is invested in a stable-value fund that pays 4% a year, too conservative a choice for long-term savings. The other half is in one stock: ConocoPhillips. That means Page's salary, pension, retiree benefits and portfolio all rest on the health of one firm. Pretty much every economic aspect of the Herberts' life--including the city where they live--is driven by one sector. Granted, it's a sector that's been rewarding lately. But with the price of oil at all-time highs and the economy slowing, it is at least an even bet that the best days for energy are behind it for now.

While the couple have been steadily saving for retirement, college planning has gotten short shrift. Page has two sons from a previous marriage; he and Tamara just had their third. His oldest is nearing college graduation, and his next oldest, a talented swimmer, could shoot for a scholarship. The Herberts have funded a prepaid tuition plan for Tori, 10, but nothing for Dane, 8, and Taryn, 10 months. "My main concern is that we are not concerned enough," says Tamara.

What They Should Do

The Herberts have an enviable leg up: as much as $57,000 in steady retirement income (including his Social Security). If Page stays on at Conoco until age 65, they could collect another $6,000 a month. But Suzanne Fails, a certified financial planner with Roberts & Fails in Stafford, Texas, says it pays to be pessimistic when it comes to corporate pensions. Few work for one company as long as they expect, and plans can change. Nonetheless, they can be more aggressive. "When you have some pension income you can count on," says Fails, "it permits you to have a higher exposure to the stock market."

Yet betting your retirement on the stock of one company, particularly the one you work for, is a poor choice. The Herberts should sell 80% of their stakes in both Conoco and the stable-value fund and switch to diversified stock funds offered in his Vanguard 401(k). Fails recommends they put a relatively large 32% into small- and midcap stocks, split between Vanguard Morgan Growth (VMRGX) and Vanguard Small Cap Growth Index (VISGX). Among large-cap stock funds in his plan, she likes Vanguard Wellington (VWELX) and Vanguard Windsor II (VWNFX), a MONEY 50 fund. For international, either Vanguard International Value (VTRIX) or Vanguard International Growth (VWIGX), another MONEY 50 fund, will do. To reduce volatility, Fails suggests a bond fund: Pimco Total Return (PTTAX).

Unfortunately, fully funding their kids' college is out of reach. She estimates they would have to put away $900 a month to do so. Instead, they should open a Roth IRA with any money they can save outside their retirement plans. That gives them the option of pulling out money penalty-free for college or leaving it be if they cover school in other ways.

After hearing Fails' advice, Page says he gets the risks of having half his 401(k) in his company. "I don't mind diversifying, as long as I'm diversifying into funds that are doing well," he adds. "And if they don't, I can always take that money and put it back in Conoco." Lesson learned?