(VFINX), 15% in the Euro Pacific Growth Fund (AEPGX), and 10% in the Montag & Caldwell Balanced Fund (MOBAX). He should reallocate his contributions, putting 48% in Vanguard, 40% in the Chicago Capital Bond Fund (CHTBX), which is a choice within his 401(k) plan, and the remaining 12% in Euro Pacific. The reason: He is duplicating efforts in the growth, balanced, and index funds, which are investing in the same types of companies. About 96% of the portfolio is invested in equities and 4% in bonds. Instead, the asset mix should be a 60% — 40% split between equities and fixed income, including both international and domestic holdings.
OPEN A SEP-IRA
Discontinue contributions to the Roth IRAs because the 401(k) is more tax efficient. You make deposits to the Roth with after-tax dollars, whereas you make contributions to the 401(k) with pretax dollars. Bolton says opening a Simplified Employee Pension Plan-Individual Retirement Account (SEP-IRA) would allow Freddie to contribute up to 15% of net income (from his employment as a consultant) pretax. Invest SEP-IRA contributions in a balanced mutual fund. With the SEP-IRA established, his combined SEP-IRA and 401(k) contributions can total up to $40,000 annually, Bolton says.
ADD TO CASH RESERVE
Contribute the $2,000 cash prize from BE to the cash reserve. At $300 a month, the amount they are saving, it will take them 12 more months to reach their desired $10,000 threshold. The sooner they get there, the sooner they can reallocate the $300 contributions to fund their children’s college education.
FUND 529 COLLEGE SAVINGS PLANS
Start contributing to a 529 College Savings Plan for both children. In California, it’s called the Golden State ScholarShare College Savings Trust and is managed by TIAA-CREF. The benefit is that the money grows tax-free, you can fund up to $150,000 total, and the money remains with the parent if the child opts not to go to college.
INCREASE INSURANCE COVERAGE
It is critical for Freddie to have disability insurance since he’s the sole breadwinner. It is not likely that Yolanda would be able to earn $120,000 as a teacher and photographer should something happen to him. Currently, the couple has $250,000 in term life insurance on him and $100,000 on her. Bolton says increase those amounts to $500,000 and $250,000, respectively. Also, draft a will with a durable power of attorney, which allows them to make financial and healthcare decisions, for both. Creating a trust is the most optimal way to provide a guardian for the Shermans’ children while also protecting their assets.
CREATE A BUSINESS PLAN
Although the Shermans plan on using sweat equity, there will come a time when they may need outside financing for their business. Bolton says, Freddie should create a good relationship with a personal banker, contact the Small Business Administration to learn the process to apply for loans, and contact the Service Core of Retired Executives (SCORE) to get advice about starting his venture. “The time to do all these things is before you need them,” he says.
Winner #26, Freddie Lee Sherman
Financial Snapshot: Freddie