The Road to Financial Freedom

To fund her and her husband's retirement and their son's college education, Theresa Reed engages in a comprehensive investment strategy

the couple to keep some of the stocks they own and diversify within sectors. Right now, they have a little bit of money scattered across too many stocks and mutual funds (e.g., $100 worth of American Tower Corp. (NYSE: AMT), $2,000 invested in six other companies, another $500 invested in four other stocks, and $100 in an Alger growth fund).

  • Consolidate mutual funds. She owns shares in three different mutual funds to which she is not adding a significant amount of money. She also has too many small-cap funds all doing the same thing. She should consolidate the funds in her Roth IRA because of the tax advantage it offers. After five years, all the capital gains become tax-free. But if she withdraws the money before she is 591/2, she will have to pay a 10% penalty on the capital gains. Dunagan suggests she put all of her mutual fund money into the Putnam fund holding in her Roth IRA.
  • Increase life insurance policies. She should boost her life insurance from $100,000 to $500,000. In the event of her untimely death, this would generate enough money to replace her income after taxes. He has about $200,000 in life insurance, which is adequate because if something were to happen to him, she could roll over his Company Retirement/Compensation Package money and live off of the interest. Since she has a permanent Universal Life Insurance policy, she should get a $400,000 term rider attached to it, but only for eight years, at which point she would be eligible for her pension.
  • Contribute to 529 College Savings Plan. The Reeds have $1,000 in an Education IRA and were thinking of using some of their stock holdings to finance their son’s college education. “They need a more definitive plan,” says Dunagan. They should sell some of the Abbott stock to pay off the $25,000 credit card debt and then use the extra money–about $500 a month–to fund a 529 College Savings Plan. You can put up to $50,000 in one year and up to $247,000 over the course of the plan. The money grows tax-free, and if Aquaylis doesn’t go to college, the Reeds can change the plan’s beneficiary.
  • Financial Snapshot: Theresa Reed
    HOUSEHOLD INCOME
    His $45,000
    Hers 40,000
    TOTAL $85,000
    ASSETS
    Checking $3,000
    Savings (Money Market) 9,000
    Stock 20,700
    Bonds 3,000
    Mutual Funds 6,200
    Company Retirement Plan/
    ESOP (his)
    600,000
    Pension/403(b)(hers) 49,500
    401(k)(hers) 6,000
    Roth IRA 1,000
    Education IRA 1,000
    TOTAL $699,400
    LIABILITIES  
    Credit Card Balances $25,000
    1st Mortgage 207,339
    2nd Mortgage 40,000
    TOTAL LIABILITIES $272,339
    NET WORTH $427,061
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