Victoria Reddic is trying to avoid getting squeezed in a financial vise. The 50-year-old widow is feeling the tension of wanting to retire early but recognizing that in the next few years she’ll need to make college tuition payments for her 17-year-old daughter, Veronica. A compliance consultant, Reddic has spent the bulk of her 33-year career at insurance giant MetLife. Feeling the lure of retirement, she says it would be great if she could ease into her golden years at age 55. But one of her big aspirations is to send Veronica, a junior in high school, to a four-year public college or university.
According to The College Board, for the 2006–2007 academic year, the average cost of tuition, room, and board at a public university was $12,796. Reddic is fortunate that she makes a very good living, bringing home approximately $89,000 annually. Yet, because of her assets and income level, it will likely be difficult for her daughter to qualify for need-based financial aid. At the same time, Reddic needs to ensure that her nest egg is large enough so that she’ll be able to withdraw $45,000 a year during her retirement.
The St. Louis native is used to facing tough financial choices. When her husband, Sylvester, died in March of 2000, she had to decide what to do with $200,000 in life insurance benefits. Initially, she put the money in an interest-bearing money-market account. In a year’s time, she had spent about $10,000 on remodeling her two-bedroom home. She also opened a brokerage account and invested another $70,000. Reddic put all her eggs in one basket, investing all of the money in a technology fund, per the suggestion of a financial adviser. Unfortunately, following the dot-com crash and 9-11, the tanking stock market added to her misfortune and the value of her portfolio was nearly cut in half.
Looking to reduce her debts, Reddic eventually used $40,000 of the death benefits to pay off her mortgage. “Paying off the mortgage allowed me to start dumping all of my extra pay into my 401(k),” says Reddic, who began socking away her former monthly mortgage payment of $800.
During the past five years, Reddic has tried
to replenish her coffers. Total investments in her retirement plans, educational savings, and cash savings are now estimated at $403,539. Her liabilities consist primarily of a $9,000 credit card balance, with a 0% interest rate, which she expects to pay off within the next few months given her discretionary income and by drawing on her $25,000 money-market account. Coping with the death of a spouse is always a difficult situation. In spite of her solid financial standing, Reddic believes she is just recovering financially since losing her husband of 17 years. “I didn’t do badly, but I could have done a better job,” she says. “I would have been further along.”The Advice
BLACK ENTERPRISE paired Reddic with Danny Freeman, a financial adviser with Darda Wealth Management in Winston-Salem, North Carolina. Taking into account Reddic’s desire to retire early, Freeman recommends the following:
Build up retirement savings. While contributing the $15,000 maximum allowed on a pre-tax basis can only help, Reddic should use the 401(k) catch-up provision that allows individuals over age 50 to contribute an additional $5,000 each year. With early retirement only five years away, she needs to make some changes to her 401(k). Freeman suggests reallocating future balances to the following types of investments: common stock index fund, 25%; value equity fund, 40%; small-cap stock fund, 15%; international equity fund, 10%; emerging markets equity fund, 10%; and company stock 5%. He says this asset mix should allow for a little more growth without exposure to significantly more risk.
Freeman notes a potential problem is that the vast majority of Reddic’s wealth is in qualified accounts, which have some restrictions on accessing the money prior to age 59 1/2. As a result, Reddic needs to accumulate money for retirement outside of her 401(k) and IRA. In order to maintain her current lifestyle in retirement at age 55, her investment portfolio should be valued at between $650,000 and $750,000. What’s more, because she is a widow, the earliest Reddic will be able to draw Social Security is age 60. Assuming a 7% average rate of return, Freeman suggests she save and invest $1,500 to $2,500 a month.
Invest for income and minimize taxes. Reddic should invest in income-generating investments, which provide an additional income stream in the form of dividends or interest. She should consider tax-free investments such as municipal bonds and municipal bond funds, which generate interest that is exempt from federal taxes and, in some cases, state taxes too. Freeman also recommends the Vanguard High-Yield Tax Exempt Fund (VWAHX), a low-cost municipal bond fund with a yield of 4.55%, and the BlackRock Debt Strategies Fund II (DSU), a high-yield bond fund that sports a yield of about 8.70%.
Diversify holdings. A possible weakness in Reddic’s portfolio is the lack of a broad exposure to real estate. While it is great that she owns a home free and clear, price appreciation for residential real estate has slowed. However, commercial real estate has been doing well and global commercial real estate has started to take off. Freeman advises that she gain additional exposure by adding more Real Estate Investment Trusts (REITs) to her portfolio. He recommends the Cohen & Steers International Realty A fund (IRFAX), a specialty real estate mutual fund that holds a variety of REITS and has a dividend yield of 2.69%.
Increase college savings. Reddic currently has $3,000 in an Education IRA that she opened more than a year ago. Obviously, this is not enough. Freeman suggests she take the $2,000 contest winnings and add it to Veronica’s college savings. However, because college is around the corner, putting the money in the Education IRA or a section 529 plan wouldn’t be very beneficial. Instead, Reddic should open a brokerage account in her name and invest in a fund such as the Fidelity Floating Rate High Income Fund (FFRHX).