Recovering from a too risky portfolio

@Money January 27, 2012: 12:48 PM ET
financial security, financial protection

Brian and Linda Mitchell, 60 and 56, Jupiter, Fla.

(MONEY Magazine) -- We spoke to five families who face challenges that could keep them from meeting their financial goals. With a few tweaks to their game plan, they can get back on course. Here, the Mitchells' story -- and the recommended financial fixes.

The past few years have been rocky for the Mitchells. In 2008, Brian was diagnosed with leukemia, and the following year Linda was laid off from her job as an administrative assistant at a middle school.

Meanwhile, their retirement savings sank drastically (seduced by earlier gains, Brian had allocated 100% to equities), and their house was losing value quickly. "It was a scary time," says Brian.

Fortunately Brian's form of leukemia is treatable, and today he feels great. Their retirement accounts have recovered nearly all their losses, and they can also count on two pensions totaling $18,000 a year when they retire. Plus, their home is now well above water, thanks to their habit of making extra payments every month.

Still, the Mitchells have plenty to worry about: Linda has not found work, and paying down their mortgage has left them with only $5,000 in cash. Brian hopes to retire in six years, but they're not sure they have enough saved. "This period has been a wake-up call," Brian says.

Their finances

  • Income: $98,000
  • Assets: $465,000 in retirement savings, $90,000 in home equity
  • Goals: Pay off mortgage, retire at 66, build their emergency fund

The problem

The Mitchells recently moved 2% of their portfolio into bonds. That's not nearly enough, say Orlando financial planners Scott Macaione and Steve Curley. "They are simply taking way too much risk," says Curley.

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They're well on track for Brian to retire at 66, but having so little cash leaves them vulnerable if Brian is laid off or unable to work for health reasons. "A roof repair would cause them to reach into their IRAs," Curley notes.

The advice

Reduce risk. The Mitchells should move to a 70/30 split between stocks and bonds now, heading toward a 60/40 split within five years.

Build the emergency fund. The Mitchells have wisely stopped making extra mortgage payments. Reducing Brian's 401(k) contribution from 10% to 6% will qualify him for the full employer match and enable them to sock away $600 a month. The goal: $30,000, or six months' worth of living expenses. If Linda finds a job, all her income should also go into the fund.

Aim to downsize. By the time Brian retires, they'll still have enough equity to sell their home and buy a smaller place with cash. They'll also cut their real estate taxes in half. Sounds like a plan.

MONEY magazine is researching an article on ways to reduce the financial pain of college. We're looking for families that can talk about new and creative ways that they're raising cash for college and cutting costs while they're there. Sound like you? Tell us your story and you might even get your picture in the magazine! E-mail  To top of page

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