•Second home Based on the outcome of estate planning, a determination would be made on how to invest the monthly savings pool of $9,300. Since the purchase of a second home is a short-term objective, a large portion may be allocated to this investment account until sufficient funds have been accumulated to accomplish this goal.
•Life insurance More life insurance may be purchased, and a life insurance trust established. This can ensure that the death benefit transfers to heirs outside of the estate. Other types of trusts can be established to transfer assets to children and grandchildren.
50 PERCENT IN EQUITIES
50% Large-Cap Growth & Income
20% Mid-Cap Blend
20% Small-Cap Blend
50 PERCENT IN FIXED INCOME
100% Tax-Free Municipal Bonds
Municipal bonds offer high yields because no federal, state, or local taxes are paid on dividend income when purchasing bonds issued in the investor's state of residence. Look for tax-free municipal bonds with a yield potential of 3.76 percent or a taxable equivalent yield of 6.56 percent.
Certified Financial Planner
Louis Barajas & Associates
Louis Barajas is a certified financial planner and founder of Louis Barajas & Associates in Los Angeles. In addition, Mr. Barajas is a principal in the accounting and business consulting practice Barajas & Torres Inc., as well as a principal in Financial Greatness Inc., a company that offers finance and investment-related books, seminars and other products. Mr. Barajas currently serves on the board of directors of the 28,500-member Financial Planning Association.
Investor Profile #1
Married couple, both of whom are 48 years old, college educated, and employed full time. Both are business professionals and they have two children, ages 4 and 10. Average annual household income is $136,900. They recently purchased a new home valued at $350,000 and have a 30-year, fixed-rate mortgage with monthly payments of $2,100. Currently, they have $50,000 in savings invested in 401(k)-based mutual funds. The couple's risk tolerance is moderate, with an investment time horizon of
•Financial objective Plan for full retirement at age 65; secure spouse's finances; save for children's college education.
Monthly Financial Statement
•Electric, heat, phone, etc. $400
•Fuel, misc. $200
Leaving a net savings pool of $2,080.25 per month ($24,963 annually).
In this scenario, the couple hopes to retire at age 65. However, based on their current plan, they will not pay off their home until they are 78 years old. To meet their goal, they should increase their monthly mortgage payment to pay off the home by age 65. Paying off their home 13 years earlier will require an additional $641 per month but will also save the couple more than $198,836 during the life of the loan. Assuming a mortgage interest rate of 6 percent, the new mortgage payment would