Investment Planning by the Decade

In 2007, Yolanda Hawkes needed advice. The Atlanta resident was ready to “invest in something besides a 401(k)” as she focused on her retirement planning. So she called on Danny Freeman, financial adviser and author of Building Wealth through Spiritual Health (Darda Press; $19.95).

To help Hawkes build assets, Freeman had her open a traditional IRA. Financial experts such as Freeman typically advise employees to max out their 401(k) contributions, regardless of whether their employers match, and then to invest in a Roth IRA or traditional IRA as well.

Only two in 10 African Americans believe they are on track to meet their goals for retirement, compared to 34% for the general population, according to The African American Financial Experience, a study by Prudential Financial Inc. Nearly 40% of those surveyed say they are way behind or haven’t even started. Almost half (46%) admit to needing help in specific areas when making financial decisions. With the financial markets having recovered from the losses tied to the Great Recession, scores of African Americans continue to miss out on the recovering equity markets.

The importance of investing for retirement is underscored when one considers that a person will need at least 70% of his or her pre-retirement income to maintain the same standard of living once he or she stops working, according to experts. Social Security alone will not provide this level of income.

For 39-year-old Hawkes, a senior corporate recruiter for a large consumer goods manufacturer, she estimates that she will need $2 million in her retirement accounts by the time she stops working. Thus far, she has amassed nearly 2.5% of that  and continues to contribute 7% of her annual salary, which is in the high five-figure range. If she stays on track, assuming an 8% to 10% annual return, she could see her retirement funds amass to a range of $800,000 to $1.1 million by the time she turns 62.

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Freeman suggested she invest in mutual funds and exchange traded funds (ETFs), including the WisdomTree LargeCap Dividend Fund (DLN) and PowerShares (PRFZ), to give her a diversified portfolio of small- and mid-cap investments. Small-cap investments are generally in companies whose total shareholder value is less than $1 billion and, while risky, are purchased due to their upside potential. Mid-cap investments are in companies whose value is usually greater than $1 billion, but less than $5 billion. These offer less of the upside potential, but come with less of the downside risk. ETFs (funds that trade like stocks) are attractive to clients for several reasons, says Freeman. “They have lower expense ratios [costs] than mutual funds, diversify a portfolio in a single transaction format, and offer lower taxes, no investment minimum, and increased trade flexibility.”
Freeman also suggested Hawkes purchase individual stocks such as Apple Inc. (AAPL), of which she bought five shares at $99 each in 2009. As of earlier this year Apple was trading at around $533.

“She bought Apple low when [others] were fearful,” says Freeman, noting Apple was undervalued at the time. “When everyone else thought the world was ending in 2009, she was comfortable enough and educated enough about the process that she went into the market.”

Everyone needs an investment plan, which is what determines your portfolio’s asset allocation mix and type of investments (see sample asset allocation tables). An investment plan should include considerations such as one’s time horizon before retiring, risk tolerance, and tax considerations. So, whether you’re in your 20s, 30s, 40s, 50s, or 60s, here are some winning strategies to help you sail through economic storms into sound retirements.

20 Somethings
As those in their 20s begin their professional careers, it is the best time to get their financial lives on track. To do that, they should:

• Invest in a 401(k) through their employer
• Map out their goals with the assistance
• of a financial planner
• Start the homeownership process
• Build solid credit and saving for retirement

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Since time is on their side, young professionals can afford to be more aggressive, with a heavy weighting of equities in their portfolio. Although some may have a low tolerance for risk, they should realize that equities have produced an average annual return of 11.83% over a 30-year period, according to a recent University of Michigan study. Investing early for retirement allows money to grow tax free and over the long term can add up to large returns. First, newly minted professionals should take advantage of tax-deferred income by investing in employer-sponsored 401(k) and 403(b) plans, which represent an easy access point for financing retirement. (For info on 2012 contribution limits, go to IRS.gov.)

Another vehicle to place young professionals on that path is an IRA. For instance, a 25-year-old who begins with a $2,000 contribution to an IRA and adds that same amount each year will end up with more than $330,000 by the time he or she is 65, assuming a 6% annual return.

The youngest clients of Edward D. Williams, founder of Fairfax, Virginia’s DEW Financial Management Group L.P.L. (www.lpl.com/edward.d.williams), matured during a decade when children saw their baby boomer parents’ retirement plans evaporate because they were not prepared for the future beyond having faith in jobs and pensions.

Now at age 26, those same clients,

who are married, employed by federal contractors, and earn combined salaries of more than $100,000 annually, are aggressively building strong retirement portfolios by investing in ETFs such as iShares. The iShares’ High Dividend Equity Fund (HDV), since its inception in 2011, has had a 12.12% total return benchmarked against the 12.56% recorded by the Morningstar Dividend Yield Focus Index.

Williams says, “Investors in their 20s should be aggressive and proactive.” So he also suggests they consider investing in individual stocks, such as AT&T Inc. (T), Merck & Co. (MRK), Intel Corp. (INTC), and ConocoPhillips Co. (COP).

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30 Somethings
While still in the early stages of their careers, those in their 30s are no longer the freshmen of their workplace. With greater incomes and responsibilities than their younger counterparts, those in this age category should:

• Continue to build upon the financial foundation set in their prior decade
• Increase their contribution rates to their 401(k)s
• Consider opening an IRA or other investment vehicle
• Look to become a homeowner at this point
• Open college savings plans, if they intend to start a family

Since many begin to get hitched and start families during this period, Danny Freeman, principal of Darda Financial Services L.L.C. (www.dardawealth.com) in Winston-Salem, North Carolina, says young professionals need to be even more focused on investing for their long-term future. A former banker, Freeman counsels thirty-somethings to be aggressive with up to 20% of their portfolio. He suggests they invest in ETFs because they have no minimums.

He particularly likes WisdomTree LargeCap Dividend Fund, an exchange-traded, diversified fund with large holdings in tech, energy, and pharmaceuticals. Nine shares cost less than $500. The one-year return is 9.75%, and the distribution yield is 3.01%. Shares purchased like stock have no minimum, and discount brokers offer the lowest commission fees. He also suggests Blackstone Group L.P. (BX), a private equity firm. He says Blackstone invests in 750 companies, has no minimum as it is traded on the New York Stock Exchange, and is liquid. “I began buying it last fall at $12.50 and it is now $16. It has the potential to grow–its metrics remind me of Apple about 12 years ago,” Freeman says.

Freeman’s long-term investment pick is Hillenbrand Inc. (HI), the parent company of Batesville Casket Co. He likes Hillenbrand’s cash flow, dividends, and sound management, and that it has diversified into medical technology and heavy equipment. “My goal as an adviser is to produce returns that beat the index and are near the stock market returns, at lower risk and expense.”

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40 Somethings
Those in this group are hitting their peak earning years, but this is also where expenses, such as home improvements, and college tuition, tend to skyrocket. Individuals in this category should:

• Look to maximize contributions to all their retirement accounts
• Ensure that emergency and college savings plans are well-funded
• Become budget conscious and resist the urge to purchase unnecessary big-ticket, depreciating assets
• Make sure that they have begun the estate planning
• process, including the drafting of a will

This group should consider the tax-friendly, low-cost, and high-reward potential of ETFs, says 40-year-old David Lopez, a tax consultant and founder of David A. Lopez and Co.  L.L.C. (www.davidlopezcpa.com) in Philadelphia. Lopez suggested his forty-something clients, a couple with a combined household income of $160,000, look at three ETFs to invigorate their underperforming portfolio of stocks, bonds, and money markets. Lopez says, “The couple was able to get into industrials, healthcare, and the financial sectors without making various transactions to purchase individual equity securities in those segments. It gave them the ability to ‘test the waters’ by buying smaller positions at various times since investment minimums are nonexistent.”

One pick was Invesco PowerShares QQQ (QQQ), 68% technology-centered with holdings in Apple Inc., Microsoft Corp. (MSFT), Intel Corp., and Cisco Systems Inc. (CSCO). It was up 24% since 2009, compared to 18% growth in the Nasdaq composite index. Second, Guggenheim Mid-Cap CORE (CZA), which invests heavily in industrials, financial services, and utilities with holdings in Ameriprise Financial Inc. (AMP), Paychex Inc. (PAYX), Xerox Corp. (XRX), and HCA Holdings Inc. (HCA). The three-year average annual total return of the Morningstar five-star-rated ETF was 22.5%. The third fund was Rydex S&P MidCap 400 Pure Growth (RFG), which focuses on healthcare, industrials, and consumer items. Among others, it owns Regeneron Pharmaceuticals (RGN), ITT Educational Services (ESI), and Equinix Inc.(EQIX). Its three-year average annual total return was 34.86%.

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50 Somethings
Known as the “sandwich generation,” they are squeezed by obligations to almost-grown kids and aging parents. Combined with the fact that they are staring down the barrel of retirement within the next decade or so, it becomes necessary to:

• Reassess their financial situation and determine if they’ll meet their retirement goals
• Look to combine retirement accounts and re-balance their portfolio depending
• on their situation
• Remember that the IRS has catch-up retirement savings provisions for people age 50 and up
• Consider at purchasing long-term care insurance

Lopez recommends this group invest in “municipal bonds, as they secure future payments and let you readjust a portfolio without relinquishing control.” Investors should investigate state municipal bonds since interest payments are usually federal and state tax free.

Lopez advised a couple in this age group to readjust their asset allocation

from 90% stock and 10% cash to 60% stock and 40% cash instruments. The reason, he says: “If the market retreats, their portfolio has less time to recover.” He also asked the couple to consider purchasing fixed annuities (financial insurance contracts that earn interest).

Lopez favors company stock such as Microsoft Corp., which had a record $21 billion in earnings for the second fiscal quarter of 2012 and is scheduled to launch Windows 8. Another is Chandler, Arizona-based Microchip Technology Inc. (MCHP), which provides microcontroller and analog semiconductors. It has growth potential and since 2007 has paid a total of $6.26 per share in dividends. Lopez also likes Sirius XM Radio Inc. (SIRI), because it has 22 million subscribers. He says nearly half of new car owners extend their subscription.

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60 Somethings
Seniors and retirees may be less concerned about contributing to their retirement and more interested in getting distributions from those accounts.  But generally they should:

• Establish a fund of safe, liquid investments, such as certificates of deposit and money markets, to meet anticipated living expenses for the next three to five years
• Focus on investing the balance in bonds and funds with the twin goal of preserving principal while protecting purchasing power
• Review estate plans

“Their income is fixed, but their expenses are subject to inflation, and hard assets serve as a hedge against higher costs,” says Ivory J. Johnson, a certified financial planner and director of financial planning at Scarborough Capital Management (www.401kadvice.com) in Annapolis, Maryland.

In 2007, Johnson advised his client, Nancy Little, to reallocate her portfolio, which was heavily weighted with General Motors Co. stock. He talked to her about investing in bonds, commodities, and gold, a good hedge against inflation that tends to do well during economic downturns.

Little owns a commodities fund, a weakening dollar fund, a managed futures position, and gold bullion. She bought the MainStay High Yield Opportunity Fund (MYHYX), which had a three-year return of 21.35%, and a fund formerly known as the Rydex Long/Short Commodities Fund (RYLFX), which had a 3.86% return since inception in 2009. She also made Central Gold Trust (GTU) 25% of her portfolio. It rose 20.58% since 2007.

“I put about 25% of my retirement portfolio into alternative investments and they’ve done better than anything else I own,” says the 61-year-old, who lives in Farmington Hills, Michigan, and works as an auditor at Ford Motor Co. “My total portfolio return was 13% from 2008 through 2011, with no volatility. I didn’t lose anything.”