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Financial Makeover: Making Up for Lost Time

By Christine Benz, (Morningstar)

CHICAGO (Morningstar) -- At first blush, Scott's goal of an early retirement appears to be out of reach. At age 48, this former military serviceman would like to find a way to retire in 10 years, having done several tours of duty in the Middle East. He has begun to save at an aggressive rate, and to date he has amassed $173,000. That's not small change, but it's not enough to fully fund a retirement that could last three decades or more.

Scott is a lot closer to hitting his goal than it might seem, though. One big benefit of his military service is that he's already drawing upon a pension paying $71,000 per year; that amount will be adjusted to keep pace with the Consumer Price Index. In addition, he's working in a U.S. government job; from that position, he will get a pension generating an additional $15,000 per year when he becomes eligible for it at age 56. The $86,000 in combined pension income doesn't meet Scott's target income level of $120,000 per year, but it does mean his income demands from his portfolio are a fairly modest $34,000 per year. When Social Security for Scott and his wife is factored into the income mix, Scott's income demands from his portfolio are lower still.

Veterans
A former military serviceman is fast on his way to being able to retire in 10 years.

The fact that Scott's pension covers a large share of his current living expenses has a beneficial side effect for his retirement kitty, too: It means he can save aggressively for retirement in the years ahead. Scott notes that he saves $5,000 per month in his taxable brokerage account and Roth IRA, and puts another $1,570 per month into the Thrift Savings Plan, a defined-contribution plan for federal workers. By saving roughly $80,000 per year, Scott should be able to bulk up his portfolio in short order, even without the benefit of robust market returns.

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The before portfolio
Scott's portfolio features a fairly conservative asset-allocation mix: 42% in stocks, 28% in bonds and 27% in cash. Another 2% of the portfolio, largely convertible bonds, lands in the "other" bucket.

He holds his assets in a few different silos, such as a Roth IRA, a taxable brokerage account and the government TSP. His Roth and taxable accounts amount to about three-fourths of his total assets, with the remainder in the TSP.

Scott noted that he's a fan of my colleague, Morningstar's (MORN) resident dividend guru Josh Peters, and his fondness for income comes through loud and clear when I asked Scott to describe his investment philosophy. "My intent is to patiently build a dividend-growth portfolio and a quality-fund portfolio that will grow to provide the principal needed to generate the income I would like to have to maintain my family's quality of life," he wrote.

Not surprisingly, his taxable and Roth portfolios contain individual dividend-paying stocks, such as Abbott Laboratories (ABT) and food distributor Sysco (SYY) as well as income-focused stock/bond and hybrid funds. Templeton Global Bond (TGBAX) and BlackRock Muni Holdings Investment Quality (MFL), a leveraged closed-end fund, are among Scott's largest individual holdings.

Within the TSP, where the only options are plain-vanilla index funds with very low costs, Scott can't help but keep it simple. His largest position is in the G fund, which provides a compelling risk/reward profile unavailable in the realm of retail funds -- a yield in line with long-term Treasuries along with guaranteed stability of principal. He also has smaller positions in an S&P 500 index tracker (the C fund), an extended market index fund (the S fund), and an international index fund (the I fund). (I wrote about the government's Thrift Savings Plan last year.)

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