•401(k) The couple only has $50,000 invested in their 401(k), and 17 years until retirement. To achieve a desired income of approximately 70 percent of their current income by retirement, assuming a 3-percent inflation rate, the couple will need to have an annual income of $163,144. To achieve this, they will need to build a critical mass of $2,719,067 with an average portfolio return of 6 percent when they retire.
To build such a portfolio in the next 17 years, and assuming that they are already starting out with $50,000 in their 401(k), the couple will need to invest an additional $40,000 per year for the next 17 years at a 10-percent rate of return. Currently they can each invest up to $14,000 in their 401(k). Once they turn 50, they will be able to invest more through IRS Catch-Up Provisions.
Considering this, the couple should invest their salaries in their pension portfolios based on asset-class investing. Typically, money can be invested in portfolios using one of three methods: market timing, stock selection, and asset-class variety. Academic white paper studies have shown that, on average, 94 percent of the variability in returns of a given 10-year investment portfolio can be explained by asset-class selection.
Since the couple has at least a 15-year investment horizon, Mr. Barajas suggests they select a portfolio for their 401(k) to mirror his global equity investment strategy to achieve an approximate 10-percent return over the next 15 years.
For all of the 10-year periods during the past 26 years, Mr. Barajas says this simulated global portfolio experienced a minimum 10.2-percent compounded annualized return and a maximum compounded annualized return of 18.5 percent.
Secure the Spouse's Finances
Because the couple recently purchased their home and most likely needs both family incomes to cover expenses, they will not have enough income if a spouse prematurely dies before they achieve all of their financial goals.
Therefore, both individuals need to purchase 20-year term life insurance policies to cover liabilities that may become a financial burden to the surviving spouse and to cover college funding for the children. Because of their monthly cash flow obligations, Mr. Barajas recommends term insurance as a sensible, low-cost option. Considering the age of their children and their mortgage obligations, a 20-year term policy should be enough time to meet their financial goals.
Long-Term Security for Children
Because of the recent home purchase, current build-up of an investment portfolio, and children who are still dependents, the couple will not be able to transfer their assets to their children if they both die at the same time.
Mr. Barajas recommends creating a revocable living trust with an estate-planning attorney to ensure the proper transfer of the home and any other assets to the children in the event of an untimely death of both parents. A properly composed estate plan would create a will as well as name a guardian and trustee to handle the affairs for the children.
5% Cash and Equivalents
10% Short-Term Fixed Income
17% U.S. Large Company
17% U.S. Large Value
17% U.S. Small Company
23% International Large Value
7% International Small Company
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