Asset Alterations

The Vinsons need to diversify their portfolio to maximize their gains

invest $2,500 a month in a municipal bond fund. Any income earned would be exempt from federal taxes, and at the end of three years, the Vinsons should have enough money to liquidate the bond and pay off the mortgage.

Open three college savings accounts. It is very likely that the Vinsons will have three children in college at the same time. The estimated cost to educate them is in excess of $286,000. Investing anywhere from $1,450 to $1,700 per month should cover that cost. However, Freeman suggests the couple begin by investing $1,000 in college savings accounts starting with $500 per month for the oldest child and $250 per month for each of the twins, using the $2,000 contest winnings to jump-start the accounts. These amounts should increase once their home and car are paid off.

Consider setting up a bypass trust. The Vinsons need to give some thought as to how to distribute their estate. Their children could see their inheritance shrink by 30% or more because of estate taxes, which could be reduced through a bypass trust. Under such an agreement, the surviving spouse would control the trust and could make distributions for him or herself or the children. Additionally, any capital appreciation on the assets inside the trust will pass on without estate taxes.

Reallocate some funds. The Vinsons have $123,313 in cash and investment assets outside of their 401(k) plan. Of this amount, $72,907 is sitting in checking accounts or money market accounts earning 2.4% or less. Freeman suggests they keep the equivalent of one year’s living expenses, about $40,000, on hand as cash in the money market account and move $30,000 into income-generating investments, including some corporate or municipal bonds. Additionally, they should increase the amount automatically transferred to their E-Trade account to $1,000 per month.

Reposition assets in 401(k) plan. Marvin has too much money allocated to international equities, which have performed well over the last three years but are aggressive and volatile. Marvin’s exposure to international equities should not exceed 10%—it is currently at 21%. He should shift funds to the large-cap value portion of the 401(k) plan.

All of these changes would shift the Vinsons’ overall asset allocation to 75% equities, 15% fixed income, and 10% cash. Marvin should constantly monitor their assets to help manage investment risk as well as any interest rate risk.

Financial Snapshot: Marvin & Rhonda Vinson

HOUSEHOLD INCOME

Gross Income $200,000

ASSETS

Cash 72,907
Stocks 50,406
401(k) 260,096
Value of Home 375,000
Value of Cars* 60,000
Total $818,409

LIABILITIES

Mortgage $104,000
Car Loan 17,000
Total $121,000
NET WORTH $697,409

*ACCORDING TO KELLEY BLUE BOOK.

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