As financial advisers we are asked by individuals and families to evaluate their financial plans and determine if they are on track to meet their goals. Take the couple Mr. and Mrs. John Doe. He is 34 and she is 36. They recently bought a house for $220,000. Before making the purchase, Mr. Doe spoke to his boss about his future with his employer, and he feels his income will increase within the year. Mrs. Doe works full-time in the medical field and works part-time in a pharmacy. Mr. Doe was saving the max to his 401(k) before the house purchase, but with the new expense, he reduced it to receive the maximum employer match (5%). Mrs. Doe contributes 3% to her 401(k). Together, they hold mostly large-cap core funds, with only 10% in international funds.
They have a brokerage account in which they contributed $3,000 to each year, but they are considering decreasing that to $2,000. In their brokerage account, they own big, blue-chip names and subscribe to the “buy and hold” strategy. Mr. and Mrs. Doe have cars that are paid for, and generally pay their credit cards off each month. They would like to start having children in about three years.
Mr. and Mrs. John Doe appear to be relatively cautious investors. While we do not have all of the information needed to fully evaluate their plan, we did notice that they did not mention an emergency fund. Since this couple recently took on the long-term debt of a mortgage, an emergency fund would be one of the first changes we would suggest. From this description, it seems that their savings are tied up in investments, either in a 401(k) or a brokerage account. If they were to have an immediate need for cash, they might be forced to sell stocks at a time when the market is down. They could rely on their credit cards, but they run a risk of increasing their debt in a time when they need cash. While the suggestion of five to six months of expenses is standard, this couple appears to have relatively stable jobs, so we would suggest $5,000 to $6,000 set aside in a savings account, short-term CDs or money market fund.
The next measure we would suggest they put in place is disability insurance. If either one were to become injured or unable to work for a few months, disability insurance should allow them to maintain their lifestyle. Additionally, if they are planning to start a family in a few years, it is likely Ms. Doe will quit her part-time job. She may even decide to stay at home for a few years, and in that case, Mr. Doe would be the breadwinner, and a disability policy for him would be crucial. They may also consider a term-life policy on him as well.
As for their savings, from the information provided, it appears that they have been making solid efforts to plan for their future. However, we would suggest they consider opening a Roth IRA to diversify their tax exposure if they fall within the income limits. Their 401(k) accounts are tax-deferred, so they will pay taxes on their withdrawals when they retire. With a Roth IRA, contributions will be made with after-tax money, so they should have some tax-free distributions in retirement. Of course, once they have children, they should consider establishing a 529 Plan for their children’s college education.
Investment wise, we feel they could be a little more aggressive in their investment selection. For a couple in their mid-30s, we suggest only 40% to 50% of their portfolio should be in large-cap core investments. We feel they should consider Mid-caps, Small-caps and perhaps an international fund. We like Baron Asset Retail (BARAX), a Mid-cap growth fund, Gabelli Small-Cap Growth (GABSX) and Artisan International (ARTIX) if they were interested in diversifying their market exposure.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
