Q: I’m 46 and have been working since I was 24. I have always been a saver, so I have about $850,000 accumulated in various accounts. I’m married and have two kids in the sixth and eighth grades. My husband and I manage our money separately because we have different investment styles (so this $850,000 is entirely mine, although I understand there is no such a thing as “mine” while we live in Texas). I also have a $50,000 emergency fund in cash. That $850,000 is in investment accounts split between Vanguard and Ameritrade. Over time these accounts have become cluttered with too many funds and stocks (some were carried over from when I worked with a Chase financial adviser). Since my kids will be going to college in four to six years, I probably should be less aggressive, even though I always feel that I can be aggressive until I retire (probably when I turn 60). This belief stems from my earning power — I have always been working. Currently I make $92,000 a year. I used to contribute 25 percent to my company 401(k) until a month ago, when I lowered it to 15 percent. I get a 3 percent match from my company. With my kids getting into their teens and becoming difficult, I’m considering taking a year or two off to be with them. Would this change how I should invest my money?
A: You clearly have a good grasp of your situation and the decisions that need to be made, though I might add that in marriage, regardless of where you live, “ours” trumps “mine.” It’s a marital life condition that is far more important than the laws of any state.
The first thing you should do is consolidate to one firm. This does not mean consolidate all your accounts; it just means combining as many accounts as possible at the same firm. Doing so will make electronic access easier. It will also allow you to see the big picture. My wife and I, for instance, have all our investment accounts housed at a single firm, as well as a checking account. It works well, particularly with getting information online.
Once the consolidation is done, you’ll need to do some “heavy lifting” and estimate how much of your $850,000 is needed for coming college expenses versus how much you can consider long-term/retirement money. This isn’t a simple task because there is a big difference between the cost of the University of Texas and the cost of, say, Stanford or Harvard or Duke. The more of your existing long-term investments you can leave in place, the better.
The college fund should be kept in safe investments, even though they are likely to earn very little. The retirement money should be invested with an eye toward return and growth at an acceptable level of risk. For lots of people hoping to retire within 15 years, that would be a balanced fund, 60 percent equities/40 percent fixed-income. With assets in reserve for education, you might be a bit more aggressive than that.
When it comes to financial planning, talking about nominal dollars isn’t very useful because inflation makes past incomes look silly. Late in the 1960s, for instance, Fortune magazine published an article titled The Good Life Begins at $25,000 a Year. The article showed the percentage of such households that went on overseas vacations, bought good wines, had country club memberships and owned luxury cars. Today, a Texas couple with that income would be eligible for a small monthly benefit in food stamps.
So you need a metric, a framework and a unified plan for your future. Let me explain. Your $850,000 is about 12 years of what you spend from your income ($92,000 income less $23,000 savings). In fact, the multiple is somewhat larger since you don’t need to replace employment taxes when you retire, and you won’t be spending the money you now spend on the kids when you retire. So, relative to most people, you are well ahead of the game. In fact, if you were driving at Indianapolis, you’d be lapping the crowd. So if you want to take a year or two off, feel free, but it would have no impact on how your nest egg is invested.
You and your husband might have different investment styles, but you still need to be on the same page when it comes to your long-term planning as a couple. If he is as diligent a saver as you, for instance, your savings as a multiple of your spending as a couple (excluding costs of the children) might be still higher than 12 years of income. Together, you should be looking for combined assets of 20 to 25 years of your expected retirement spending, including taxes. This multiple can be adjusted downward if you factor in the value of Social Security benefits, even if you take them at age 62.
Questions about personal finance and investments may be sent by email to scott scottburns.com.