Eyes on the Prize

April McLemore wants to �retire by age 55. But will she have enough money saved in 16 years to live �comfortably?

McLemore’s monthly take-home pay is roughly $6,500, with living expenses adding up to $4,500 ($1,000 of which is deposited into a money market account earning 1.49% interest and an additional $250 is applied to her mortgage payment). In addition, she is contributing 10% of her salary to her 401(k) plan, which is currently valued at a little more than $34,000.

McLemore saw her 401(k) take a big hit during the 2008 stock market decline. But just as she value shops for food and clothing, she should have applied the same principle to her investments. Instead of becoming fearful and moving her funds into a more conservative allocation, she could have done some “bargain hunting” for investments that had fallen in price.

“I know that the money I make right now I may not make forever,” she says. ”So, I need to make sure I am putting it in the right places. I want to get the best return on my money for the future.”

The Advice
Black Enterprise devised a plan to help McLemore achieve early retirement:

Raise 401(k) contributions and consider a later retirement date. Given her current portfolio, McLemore’s desire to retire at age 55 and live comfortably without any future employment income isn’t practical. With only about $35,000 amassed in her 401(k) plan, this is hardly enough to get her to where she needs to be in 16 years. Lee Jenkins, a managing partner and financial adviser at Atlanta Capital Group and the author of Lee Jenkins On Money: Real Solutions to Financial Challenges (Lift Every Voice; $14.99) says McLemore needs to increase her 401(k) contributions from 10% to 13.75% of her income. “That percentage increase would allow her to max out her contribution limit at $16,500. It would be an additional $4,500 a year, or just $375 a month, which she could easily afford.” With a company match of $3,600 per year (which represents a 50% match on the first 6% of her income), April will have annual 401(k) contributions of $20,100. To live comfortably in retirement, she will need $84,000 each year (70% of her current income of $120,000 as a rule of thumb).

Rebalance 401(k) investments. Her current 401(k) allocation is 70% fixed income, and 30% equities. This allocation is too conservative at age 39, says Jenkins. “She needs to be more diversified with her retirement investments. For instance, she currently has only three investments in her account, although her company offers more than 30 different mutual funds.” She currently has 56% in the PIMCO Total Return Fund, 28% in the AllianceBernstein 2030 Retirement Strategies Fund, and 16% in IAC stock (her company’s stock). Jenkins recommends six areas of diversification: 20% large cap stocks; 15% small cap stocks; 15% large cap international stocks; 15% IAC Co. Stock Plan; 10% in a global REIT; and 25% in a fixed income fund.

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