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Have funds, will travel
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June 21, 2001: 8:22 a.m. ET
Idealistic fifty-somethings seek to chuck the work world early, head west
By Staff Writer Alexandra Twin
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NEW YORK (CNNfn) - Cho LaReau and her husband Wesley have a daydream. They want to retire from their high-paying but emotionally unrewarding jobs, get in their car and start driving.
They would love to travel outside of America's cities, leave behind their home in Denver and take a ride through Arizona and Montana and really see the West. Maybe even join the Peace Corps and do something meaningful with their lives.
A not uncommon daydream for a pair of idealistic twenty-somethings.
Except that Cho and Wesley are in their fifties.
"I don't love what I do for a living," Cho LaReau explained over the phone. "I feel swamped by my huge corporation. My husband and I are free spirits. We want to feel like we make a difference."
A purchasing manager for a clinical laboratory, Cho LaReau, 51, earns $95,000 a year. Her 54-year old husband is a self-employed software engineer with a two-year, $230,000 contract due to expire in February 2003. Ideally, they'd love to begin their early retirement a year or two past this point.
They have $110,000 left on their mortgage. They'll make $3,800 a month in payments until the house is paid off in 2004. Their two grown children -- a daughter, 29, and a son, 33 -- support themselves fully. The LaReaus would like to have about $50,000 in annual after-tax income to live on once the mortgage is paid off.
Portfolio Rx is a CNNfn.com feature that looks at issues like portfolio diversification and asset allocation. In each article, we review a reader's investments and ask financial experts for advice.
The LaReau family has five mutual funds spread between her 401(k) and several IRAs, $600,000 in bank CDs and two individual stocks, quite a substantial sum considering that they didn't begin planning and investing for retirement until they were in their mid-30s.
They have no credit cards. They have no outstanding loans. Amazingly, they have no debt at all beyond their mortgage. This comes from a unique investing policy that Cho LaReau, the family's money manager, sticks to firmly: pay for as much as possible with cash.
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 BRIAN OROL'S RX:
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Consider reallocating CD holdings to include government agency bonds, such as Freddie Macs and Fannie Mae's, as well as the government I-Bonds. (I-Bonds are inflation protected and offer very attractive yields going out up to 10 years.) This approach would minimize the loss of purchasing power after retirement.
If a rate of return of approximately 6.5% is expected for the next 3 years, and 6.0% thereafter, they should be able to withdraw an inflation adjusted $50,000 per year for living expenses.
In the non-IRA accounts where capital gains can sting, a reallocation of a portion of their growth funds into blue chips, such as General Electric, Wal-Mart or Fannie Mae stock, may be worth some thought.
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If she gets an annual bonus at work and the family doesn't need it right away, she throws it into the savings.
Each spouse has a car, their home is nicely furnished, they travel, they treat themselves well, and they pay for it all in cash. Living responsibly, but not frugally, is their style.
LaReau attributes this philosophy to her upbringing in the less debt, loan and credit card conditioned culture of Seoul, Korea.
In general, she prefers investing in no-load funds with a strong performance history. She likes to buy into something good and stay with it long-term. She is a meticulous researcher, contributes the maximum to her 401(k) (as does her husband to his SEP-IRA) and seeks to make the most of whatever tax advantages they have.
"The statistics that show a negative savings rate for the average American family, who spend more than they earn, will not be borne out by the LaReaus," said Brian S. Orol, a certified financial planner with Strategic Financial Planning Group in Raleigh, N.C. "They have done a great job of saving, living below and within their means and planning for retirement."
Some key sticking points for Orol: What will their health insurance situation be at retirement? Will her employer offer to keep them in the plan? If not, they should count on paying up to $650 per month for health insurance. Also, have they planned for life insurance? As for his specific investing advice, take a look at "Brian Orol's Rx."
Diversify diversify diversify
Virginia Gerhart is a certified financial planner from San Rafael, Calif. Assuming a modest 3 percent total return over the next two years, plus $51,000 in additional contributions ($21,000 to her 401(k) and $30,000 to his IRA, in keeping with their investing tendency so far), she estimates they will have a portfolio of more than $1,100,000 in two years.
This is impressive, but she recommends that they reallocate some of their holdings.
1) Fixed income is the largest single asset class in their portfolio. Why not take the money Mr. LaReau would be putting into his SEP-IRA and add that to value funds.*
2) Sell the two small stock holdings and put the approximately $10,000 into value funds.*
3) They have $210,000 in large-cap core holdings. Reduce that to $200,000 by selling $10,000 of the $60,000 in Schwab 1000 (SNXFX: Research, Estimates) and put that into value.* Consider taking the remaining $50,000 out of Schwab 1000 and putting it into a better-performing large-cap core fund, such as UAM McKee Domestic Equity (MKDEX: Research, Estimates). Schwab is not a poor fund, but it has ranked only in the 40th and 60th percentiles of its peers since inception.
4) Up the global/international quotient. They have $50,000 in Janus Worldwide. The stock currently is down 1.5 percent more than its class, but is consistently ranked at or near the top of its peers. She suggests that they add $15,000 more, from Mr. LaReau's future SEP-IRA contributions.
*Value: it's an important diversification that this portfolio lacks, Gerhart said. Add the *amounts to multi-cap funds such as Oakmark (OAKMX: Research, Estimates) or Oakmark Select (OAKLX: Research, Estimates) and large-cap funds such as Ameristock (AMSTX: Research, Estimates) or Saratoga Large-Cap (SLCVX: Research, Estimates).
With the assumption of $64,000 pre-tax income needed (to have $50,000 a year income) annually, this new portfolio should give them a 5.8 percent return.
Both planners seem to agree that, whatever reallocation notwithstanding, the LaReaus are in quite good shape for achieving their goals.
"This couple has done an outstanding job of keeping debt to a bare minimum and keeping to their plan of a modest, but not Spartan lifestyle," Orol said. "Their reward is to be well-prepared for the third age -- their 40 years of retirement."
The next challenge? Deciding where to visit first.
If you would like to be considered for our Portfolio Rx feature, send an e-mail to retirement@cnnfn.com with the following information: Your age, occupation, income, assets, debt and expenses, your retirement goals, such as when you wish to retire and what type of lifestyle you envision. Also include specifics about your long-term savings portfolio: your 401(k) and IRA accounts; which mutual funds, stocks and other securities you own; and information about any other source of retirement income you expect, such as a pension. Please include a daytime phone number so that we may reach you. If we choose your portfolio, we will use your information, including your name, in an upcoming story. 
* Disclaimer
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