Until recently, 35-year-old Michelle Rooks, a mortgage banker at Wells Fargo in Minneapolis, had an investment portfolio consisting only of her 401(k) plan — and that was primarily made up of her company’s stock. Her husband John, a 38-year-old boiler manager for the YMCA, had never even considered contributing to his employer’s 403(b) (the equivalent to a 401(k) plan for non-profit organizations), even though he has worked for his organization for almost 10 years. With a daughter headed to college this year, one in high school, and another in middle school, the Rooks needed an investment strategy that would give them liquidity to pay bills and save for college costs during their earning years, generate income to fund their retirement, and provide security for their daughters’ financial futures.
While the Rooks made some attempts to handle their finances responsibly, they knew they needed help. The family has relocated twice for Michelle’s job, and luckily, John has been able to transfer from one YMCA to another without losing any seniority. But saving has not always been a priority for the couple, especially while raising three children. “I’ve been saving toward my 401(k) plan ever since I got a job,” says Michelle. “But in my husband’s family, that wasn’t their practice.” Even Michelle’s efforts to save had flaws. “I was investing too much in my 401(k) plan and I can’t touch that,” she explains. “I was doing additional employee stock purchases as well. But when [the accounting scandals] started happening with other companies, I really wanted to diversify.”
The first step the Rooks took was to find a compatible financial advisor. They found a match with Kimberly Helm, a representative of American Express Financial Advisors in Minnesota. The Rooks’ annual household income is near $135,000 and after evaluating their needs and aspirations, Helm first advised them to begin building an emergency fund by saving $100 per month. Once the account they started last year reaches $2,000, they should transfer that money to an interest-bearing money market account, which will allow them to draw on it without penalty.
Next, Helm went to work on their investments. After a closer review of John’s salary, it was determined that he would begin contributing 17.5% of his salary to his 403(b) retirement plan. Since he had little saved for retirement, Helm suggested that he place 75% of his contribution into a mix of large-cap and small-cap growth mutual funds, 20% in international stocks, and 5% in bonds.
Michelle continues to contribute 8% of her salary to her 401(k), and Wells Fargo matches up to 6%. She has saved some $58,000 already, but she had too much Wells Fargo stock and no diversity. “[Michelle’s portfolio] had 71% in large-cap stocks and the other 29% in small-caps, international stocks, and a cash balance. People think they’re diversifying because they’re putting money in different funds, but in essence they just have a high correlation of the same investment,” says Helm. She adjusted the asset allocation in Michelle’s portfolio to 28% large-cap, 24% mid-cap,