winnings to start the emergency savings and then start contributing $150 a month. The CD is earning less than 1%; she can get 1.25% using a high-yield savings account, says McIntosh. â€śAt a time when rates are low, the CD will lock her in, but a high-yield savings account will increase as interest rates eventually rise,â€ť he adds. Once the cash reserve reaches six months of gross income, reallocate the $150 a month to an individual, self-directed investment account with a discount brokerage firm. This enables Acie to grow money apart from retirement funds, McIntosh says.
â€˘ Roll over 403(b) funds. McIntosh recommends that Acie convert the $19,000 from previous employersâ€™ 403(b) accounts into a Roth IRA (contributions are not tax deductible but the money is not taxed if withdrawn after age 59 1/2). In addition, she should spread that amount over a two-year period so that itâ€™s reported as income on her 2011 and 2012 tax returns. McIntosh suggests this asset allocation mix: 10% Emerging Markets; 14% International Stocks; 7% Real Estate; 16% International Bonds; 12% U.S. Large-Cap Value; 7% Commodities; 12% Immediate U.S. Government Bonds; 8% U.S. Small-Cap Growth; 14% U.S. Small-Cap Value. Based on the combined historical performance of the allocation of asset classes for these funds, this portfolio mix has produced an average rate of return of 9.86% per year, including two of the worst bear markets since the Great Depression, McIntosh says.
â€˘ Maximize 403(b) contribution. McIntosh recommends that Acie start contributing $1,000 a month into the 403(b) plan with Wake Forest. This will reduce her taxable income by $12,000 a year. At the end of 2012, when she is no longer paying taxes from converting her 403(b) funds to a Roth IRA, she should reduce her 403(b) contribution to $416 a month and contribute the maximum allowed to the Roth ($5,000 annually) to help build tax-free income. In two years, Acie will also begin getting her employerâ€™s 5% 403(b) match. McIntosh suggests she select a diversified mix of Vanguard funds: 8% Emerging Markets; 12% International Stocks; 7% Commodities; 12% U.S. Large-Cap Growth; 12% U.S. Large-Cap Value; 10% High-Yield Bonds; 11% U.S. Government Bonds; 5% Short-Term Bonds; 6% Real Estate; 7% U.S. Small-Cap Growth; 10% U.S. Small-Cap Value. While Acie is limited to her employerâ€™s 403(b) plan investment options, this portfolio mix should provide an average annual rate of return around 8.25% based on past performance of the allocation of these asset classes, says McIntosh.
â€˘ Open a 529 college savings plan. Assuming Acie is still employed at Wake Forest when Sydney reaches college age, the university will cover 94% of tuition there, or $6,665 at another institution. Since Acie wants to stay in academia, she doesnâ€™t expect to foot a huge chunk of Sydneyâ€™s college bill. McIntosh suggests she contribute $175 a month to North Carolinaâ€™s National 529 College Savings Program. The state allows 529 plan contributors to deduct up to $2,500 from their individual state income tax return. So, thatâ€™s $2,100 Acie can write off each year. In 12 years, Acie should be able to amass about $40,000.