Money & Policy

A Money Makeover for the Financially Conservative

After reviewing one couple's investments and debts, an expert offers tips to create a more diversified retirement portfolio  

Can you be too conservative with your money?

That was Stacey Anderson’s first question when I met her and her husband, Daniel, to review their finances.

It cut straight to the heart of the financial concerns of the couple, who are in their late 50s. (Their names have been changed for privacy reasons.)

Stacey, who works in the marketing department at a university, and Daniel, who has a school maintenance job, are grappling with the question of how to best save for their retirement and finance college for their 17-year-old son, Jack.

Before they embarked on their current careers, Stacey was a reporter and Daniel was a stay-at-home dad.

(MORE: How to Make Your Retirement Money Last)

Their Guiding Money Principles

During their marriage, the couple has followed three basic conservative financial principles, which I endorse:

The Andersons inherited many of their core money values from their Depression-era parents.

“Our strongest priority: little or no debt,” Stacey says. “We own both of our cars outright and we have one credit card that we pay off every month.” The mortgage on their home is fully paid off, but they have a 5.25 percent loan on a second home.

How Buy-and-Hold Paid Off

Her sister-in-law gave the couple the buy-and-hold advice. Based on her recommendation, in 1989 the Andersons bought stock in “a then-little-known company” called Intel, as well as a few others, Stacey says. “Lock away the stock certificates and forget about them,” her sister-in-law said. “You don’t know enough to trade.”

Stacey told me that Intel has “done well” for them. Done well, indeed! In 1989, their Intel shares cost less than $4 a share (adjusted for 5 splits). Today, the stock sells for about $22. The stock has risen considerably more than the S&P 500 and currently generates a 4.2 percent dividend.

Holding onto the Intel stock until they needed the money allowed the couple to reach two of their financial goals. “Intel helped us do major upgrades on our 100-year-old house and make a sizable down payment on our investment property,” Stacey says.

Amassing More Than $200,000 in Retirement Savings

The Andersons also participate in generous 403(b) savings plans at work, similar to 401(k)s. Each puts in 5 percent of salary; their employers match those contributions.

(MORE: Seeing Your ‘Future’ Self Can Make Retirement Better)

Through steady savings over the years, the couple has accumulated more than $200,000 in their retirement plans, investing in funds from TIAA-CREF, Vanguard and Fidelity.

Why Their Investments Aren’t Really Conservative

But when it comes to investing, the couple is actually less conservative than they think they are.

In fact, I’d say their investment portfolio could be described as aggressive, because almost all of it is in stock funds split among an S&P 500 index, small cap funds (ones that buy stocks of small companies) and health care funds, along with a few individual stocks.

Should the Andersons move away from the stock market to match their conservative financial philosophy?

Actually, I think the preponderance of stock in their portfolio isn’t problematic for several reasons.

Stacey and Daniel don’t plan to tap into these accounts for nine or 10 years, at which point they will be in their late 60’s and will partly or fully retire.

They also have sufficient cash in the bank to handle any financial emergencies, more than the standard benchmark of six months of living expenses.

In addition, I think that diversifying into bonds is a bad idea right now — yields on bonds and many other income-producing investments are near historic lows.

Locking into puny rates for more than a year or two will be extremely painful when interest rates do rise and the bond prices fall.

How They Should Diversify

I do recommend, however, that the Andersons diversify their portfolio by adding international funds. Limiting investments just to U.S. stocks literally leaves a world of opportunities out of their reach.

I also told Stacey and Daniel I thought they should consider investing some of their retirement money in Roth IRAs.

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The Roth IRA earnings would grow tax-deferred and the couple could withdraw the money tax-free when they retire. Since Stacey and Daniel are both over 50, each can sock away as much as $6,500 in Roth IRAs in 2013.

Time to Refinance

I also urged the couple to increase the amount they could put into savings by refinancing the 5.25 percent mortgage on their second home, which they currently rent out.

A quick look at Bankrate.com showed that Stacey and Daniel could apply for a no-points, 30-year fixed rate mortgage at about 3.4 percent and lower their monthly payment by roughly $200.

How to Pay for College

When it comes to Jack’s college, the Andersons expect to take advantage of tuition remission discounts similar to the ones they received for their two older children. Because of their jobs in academia, Stacey and Daniel were able to send them to private colleges in their state for 25 percent of the regular tuition cost. As a result, both kids graduated debt-free.

Jack also has a modest inheritance and savings of about $25,000 to help pay for his college bills. But Stacey and Daniel don’t feel they can afford to take on debt to pay Jack’s tuition. If their son chooses a school without tuition remission, they say, he’ll have to take out loans on his own.

Make Some Key Retirement Calculations

When I spoke with Stacey and Daniel about their retirement plans, they told me that, like many boomers, they plan to keep working past 65, though not necessarily full-time. So I suggested they project their expenses in retirement and estimate the amount of income they’ll receive from Social Security and their pensions so they can rough out how much money they’ll need to withdraw from their investment portfolio.

Given their conservative, low-expense lifestyle and their intentions to keep saving diligently, I think the couple should be able to look forward to a very comfortable retirement.

Erica Whittlinger
By Erica Whittlinger
A financial guru on MPR’s Sound Money and chief executive of a successful money management firm, Erica Whittlinger de-stressed by chucking it all to become a ski instructor in Park City, Utah. She also conducts retirement and investment workshops for small businesses, professional associations and affinity groups. Contact her at [email protected].

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