|
Portfolio Rx: two if by sea
|
 |
June 28, 2001: 10:48 a.m. ET
Single mom with a 4-year old plans for her child's tuition, a seaside retirement
By Staff Writer Alexandra Twin
|
NEW YORK (CNNfn) - Cynthia Dougherty spent her childhood in a blissful ocean town on the coast of Texas. Now she spends her adulthood working long hours as an attorney in Austin, the state's capital.
Although she enjoys her work, one can hardly blame her for having seaside ambitions for her retirement.
"I would love to retire around 57 or 58 and move to a smaller home near the coast of Georgia, Texas or Florida, to write or paint and do a little volunteer work," Cynthia said over the phone from her downtown office, on a ten-minute work break.
Included in the retirement daydream are frequent trips to see her daughter Anna, who by the time her mom retires will be a sophomore or junior in college.
With more and more people having children later in life, planning for both retirement and college tuition simultaneously has become a reality for many families.
As a single mother who is supporting her child on her own, the tremendous balancing act that this requires is only intensified. At four years of age, Anna is her mom's biggest inspiration and biggest reminder that she needs to be aggressive in her planning.
Although she didn't start planning until shortly after Anna's birth, Dougherty has taken to the task with a relish, saving more than $100,000 in three years.
Dougherty, 42, is a firm believer in dollar-cost averaging, in which you automatically deposit a set sum of money into a stock or fund each month, regardless of how it is performing. She says that she doesn't have much discipline and that this formula helps her. She buys stocks and funds directly from the companies, using discount online broker Quick & Reilly.
She is by all definitions a buy and hold investor. In fact, she has never sold a single stock or mutual fund that she has bought. "Even when they lose money, I am afraid if I sell them that the next day they will go back up," she said.
She often chooses stocks and funds based on what she uses day-to-day. She looks at her computer and notes that it includes an Intel chip. She goes to Home Depot (HD: up $1.46 to $48.31, Research, Estimates) or Wal-Mart (WMT: up $1.13 to $49.63, Research, Estimates) on the weekend and figures other people must, too. She invests from what she knows.
Having paid off her student loans from law school, which used to eat up 30 percent of her income, the only debt remaining is the mortgage on her home. She has $275,000 left to pay on her $350,000 house with a 15-year mortgage at a rate of 6.37 percent.
She previously earned $205,000, but has reduced her hours to 75 percent of her prior time in order to spend more time with her daughter during the year before she starts school. She currently earns $153,750 per year.
Her hope is to streamline her portfolio, maximize returns and live comfortably, but not extravagantly. She would like to have $80,000 a year after-tax to live on.
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.
Cynthia has three IRAs, a 401(k), a pre-paid college tuition fund for her daughter, life insurance, a variable annuity, a cash management account (money market fund), two other mutual funds and 28 individual stocks.
She also has disability insurance through work and a will and living trust to protect her daughter after her death.
Cynthia's individual stocks
| IBM |
159 shares |
| Intel |
59 * |
| Home Depot |
50* |
| Charles Schwab |
7* |
| Gannett |
4 * |
| Wal-Mart |
9 |
| Pfizer |
34 shares* |
| Johnson & Johnson |
6 shares* |
| General Motors |
12 shares* |
| Exxon-Mobil |
12 shares* |
| Delta Airlines |
2 shares |
| Coca Cola (COKE) |
11 shares |
| Honeywell |
1.5 shares |
| AOL-TimeWarner |
7 shares |
| Sprint (FON) |
2.5 shares |
| Xerox |
1 share |
| Citigroup |
33 shares* |
| Cisco Systems |
124 shares* |
| Compaq Computers |
5 shares |
| Dell |
50 shares |
| Disney |
10 shares |
| Exodus |
25 shares |
| Gap |
10 shares |
| Mellon Bank |
10 shares |
| Southwest Airlines |
15 shares |
| Sun Microsystems |
132 shares* |
| Tyco International |
3 shares |
| WorldCom |
50 shares |
* indicates stocks she purchases by automatic withdrawal from her checking account on a monthly basis using dollar-cost averaging
|
Ronald Pearson's Rx
"Considering that she started saving three years ago, she has done well," said Ron Pearson, a certified financial planner in Virginia Beach, Va. "I applaud her choice to put more emphasis on quality of life and her lack of debt."
Pearson notes that she has more than 50 percent of her portfolio in technology stocks, both individually or within mutual funds. He estimates that her portfolio probably lost more than 16 percent (or 5 percent worse than the S&P 500) during the last year. Her money is split 87 percent in U.S. stocks, 10 percent in cash, and three percent in international stocks.
In saving for her daughter's tuition, including the Texas pre-paid tuition plan, Pearson estimates that Dougherty should plan on saving about $6,000 annually for public school, for an annual tuition of about $24,000 in today's dollars. Factoring in five percent tuition growth annually, she would need about $47,500 by the time Anna starts school.
| |
 PEARSON SUGGESTS:
|
|
| |
|
Maximize 401(k) contributions ($11,000 next year going up to $15,000)
Maximize Roth IRA contributions (($3,000 next year going up to $5,000)
Continue drip purchase of individual stocks and/or invest in Exchange Traded Funds (ETFs)
ETFs virtually eliminate tax consequences and are a more efficient way to invest than either Variable Annuities or Variable Universal Life Insurance
Keep current variable annuities/variable universal life policies; but don't contribute unless needed to maintain life insurance coverage
|
|
|
"Saving $2,000 annually in an Education IRA (starting in 2002) or a college savings plan (529 plan) earning 8 percent should provide the needed money," Pearson said. "The Education IRA has the most flexibility since the new tax law allows money to be spent on computer technology, Internet access or K-12 expenses in addition to college costs."
For this kind of IRA, he likes Dodge & Cox Balanced (DODBX: Research, Estimates) fund, with a 10-year average return of 13 percent and no losing years in the last 10 years.
Another option is to fund the tuition expenses from her own taxable assets by gifting low tax basis stocks to her daughter to liquidate for college, with lower capital gains taxes.
In order to reach her own early retirement goals, Pearson estimates that Dougherty will need to generate $134,000 annually in about 15 years at 3.5 percent inflation to reach her retirement goal of $80,000 in today's dollars, or about $2.7 million.
To do this, he estimates that she will need to save $85,000 annually at an 8 percent growth rate, $70,000 at a 10 percent growth rate or $40,000 at a 15 percent growth rate. Realistically, $40,000 is probably her best bet. "As she approaches retirement age she may choose to work a little longer or live on less income if, as I suspect, the future growth rate is closer to 8 percent than 15 percent."
Pearson sees her current portfolio as being over-weighted towards growth and technology. In addition, a number of her holdings are under-performing, so she may want to reallocate. (To see Pearson's redesigned portfolio for Dougherty, click here.)
"She is off to a good start," Pearson concluded, "and with savings discipline, she has a good chance of achieving her goals."
If you would like to be considered for our Portfolio Rx feature, send an e-mail to mailto:retirement@cnnfn.com with the following information: Your full name, age, location, 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 full name, in an upcoming story. 
* Disclaimer
|
|
|
|
|
 |
|
