The Makeover: “If he is risk-averse for the short term, he should consider investing the $10,000 in bond funds,” she says. “That should include inflation-adjusted bonds or TIPS.” TIPS are Treasury Inflation-Protected Securities. Issued by the federal government, they offer a yield designed to keep pace with inflation. Longer-term, Safran suggests Hudson put 50% of his portfolio into a large-cap mutual fund that holds both blue-chip growth stocks and value stocks. “He also might have 10% in a small-cap stock fund, 15% in a mutual fund made up of foreign stocks focusing on developed markets, and 5% in an emerging market stock fund,” she says. “The remaining 20% should be allocated to domestic bond funds and cash.”
Lastly, Hudson should consider maximizing his contribution to his 401(k), if possible. “An annual contribution of $16,500 (the maximum salary deferral in 2009 for someone under age 50) growing at a 5% annual rate will grow to more than $2 million at age 65,” Safran says. “The company match is a huge bonus.” With these suggested changes, Hudson can take more control over his investments—and his destiny.
Jeremiah, 34, Tamara, 32, and Kanon Dervin, 6 mos. | Chicago
Current Savings Strategy: The Dervins had a son earlier this year. Even though they’re concerned about funding the baby’s future education, they’re still planning for retirement. Tamara is an auditor for the U.S. Commodity Futures Trading Commission, a federal agency, where she’s worked for four years. Even though that means she has benn working toward a federal pension, she doesn’t know if she’ll stay at her current job long enough to qualify for its retirement benefits. In the meantime, Tamara participates in the federal Thrift Savings Plan, Uncle Sam’s version of a 401(k).
Until early 2009, Tamara had been contributing 5% of her pay into the account, where she gets a full match. After their son was born, new expenses forced her to cut her contributions to 2% of pay (about $180 a month). Naturally, the cutback reduced her employer’s match. “I intend to go back to 5% soon,” she says. Her savings in the account now stands at roughly $12,500. The allocation of assets is: 25% in a common stock fund, another 25% in a small- cap fund, 30% in an international fund, and 20% divided evenly between a 2030 target-date fund and a 2040 target-date fund.