Couple's Steady Savings Yield Portfolio That Needs Only Fine-Tuning

In three years, Larry Young will have more time to watch every movement of his portfolio. That's why he's watching it carefully now.

Young and his wife, Shirley, both 52, have spent decades building a well-diversified retirement portfolio, following near-bankruptcy in the 1970s due to a layoff. That's when he started aggressive investing through a company-sponsored retirement plan. Young has squirreled away more than $1 million in a 401(k) plan through his employer, Lockheed Martin (LMT Quote), in Palmdale, Calif., where he is a construction project coordinator.

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"At that time, I vowed to never be caught without funds again,'' says Young, the father of three grown children and five grandchildren.

The Youngs are poster children for the virtues of steady investing and the value of compounding returns. When they retire in three years, they could be looking at more than $100,000 per year in new cash to spend, assuming a historical 10% stock market return. But, before they even have to tap into their retirement account, the Youngs have an annuity that will pay them $2,000 per month for 10 years beginning at retirement. That, combined with rental income of about $1,000 a month from a second home, should allow them to let their 401(k) assets continue to grow even after they stop working.

In 2013, after the annuity stops paying out, their portfolio could well be worth almost $4.5 million, if the stock market continues returning an average of 10% annually.

Young Family Portfolio
Holding	Value	YTD Return
S&P index fund* (in 401 k)	$307,988	-0.25%
(ANWPX Quote)New Perspective Fund (in 401k)	376,452	3.70
American Century Growth (in 401k)	422,636	2.88
Lockheed Martin (LMT Quote) (in 401k)	26,829	10.3
(TWGGX Quote)American Century Global Growth (in IRA)	39,250	-0.85
Walt Disney (DIS Quote)	4,100	44.4
WordCruncher (WCTI Quote)	1,050	N/A
Source: Morningstar, Baseline. Returns through April 26. *No publicly available ticker. Estimated returns based on returns for (VFINX Quote)Vanguard 500 Index fund.

Is there anything Young could do better with his portfolio?

We put that question to money manager Barbara DeMartini of Ventur Asset Management in Locust Valley, N.Y.

Her conclusion: There aren't many areas the Youngs have overlooked. "They seem to be very disciplined in their savings and investing,'' she says. Plus, they've chosen the best options that are available in Larry's 401(k) plan, she adds.

Still, she says, there's room for some improvement before the Youngs call it quits in 2003.

Larry's 401(k) account has just three funds, but they are pretty well-diversified. The core holding is an S&P 500 index fund managed by State Street Global Advisers, the plan's sponsor. Another third of the portfolio resides in American Funds' $35.7 billion (ANWPX Quote) New Perspective , a world stock fund with a significant exposure in Japan and Europe. The final portion is in the large-cap (TWCGX Quote)American Century Growth.

DeMartini notes that there is some overlap between the American Century fund and the index fund because both focus on large-cap companies. But that's not a big worry because the American Century is "an actively managed fund that does move in and out of various sectors, seeking capital appreciation, and does not merely mimic the index,'' she says.

Aside from the three funds, Young has almost $27,000 in Lockheed Martin stock in his retirement account. DeMartini doesn't see much reason to hold onto the stock because it's a relatively small position among his holdings. For the sake of "cleaning up" the portfolio, she says Young could sell it and divide the proceeds equally among the three funds in the account.

Beyond the 401(k) plan, both spouses each have more than $19,000 in IRA accounts invested in the (TWGGX Quote) American Century Global Growth fund. (Shirley is a part-time bookkeeper.) Though there's some overlap between this fund and the New Perspective fund in Larry's 401(k), DeMartini says it's not worth changing because it represents only 3% of the total portfolio.

On the other hand, the Youngs might consider using their IRAs to plug some holes in their portfolio, notably in the mid- and small-cap areas. Larry's 401(k) doesn't offer any options there.

If he does make the switch, DeMartini advises caution. The recently choppy performance of mid- and small-caps will not help the Youngs sleep better at night, because Young "doesn't seem like the kind of guy who's comfortable going out on a limb," DeMartini says.

Young also has about $5,000 in shares of two other companies, Walt Disney (DIS Quote) and WordCruncher Internet Technologies (WCTI Quote), a tiny business-to-business Internet company with a market capitalization of only $48 million. He says he bought WordCruncher as a hot stock tip and now calls it a mistake.

Selling either stock would create a taxable event. But since they are such small amounts, it may be worth it to further consolidate his holdings, DeMartini says.

The rest of the taxable account could use a breath of fresh air, DeMartini says. The Youngs have limited themselves to ultrasafe savings bonds, probably a holdover from their past financial woes. They dutifully contribute $1,000 per month to this investment through a payroll deduction. The bonds have a current value of $85,000 and a face value at maturity of $160,000.

As a growth manager, DeMartini doesn't see much point in the savings bonds. Interest from savings bonds -- 4%-6% annually -- is federally taxable, though tax-deferred.

Instead, DeMartini says the Youngs should consider tax-exempt municipal bonds from a high-quality California-based issuer. Interest from such investments is free from both federal and state taxes. They could build a portfolio of staggered maturities that would come due at different times to provide tax-free income.

If the Youngs want to be a little more aggressive, DeMartini has several choices in equities. The most conservative option would be a utility fund, such as (FSTUX Quote)Invesco Utilities, because it provides both an income component and growth in the hot telecommunications sector.

A somewhat riskier approach might be to invest in the (JANSX Quote)Janus fund, a large-cap growth offering that has some overlap with the index fund in his portfolio. If the Youngs really want some high-octane investing, they could consider the (TVFQX Quote)Firsthand Technology Value fund, which, though volatile, is one of the sector's most consistent performers.

Regardless of which equity option they may choose, this isn't the time to start piling into anything. "This market hasn't shown that it's got any legs yet," she says.

When should they make a move? That's a hard question to answer, she says. "It's really going to be dictated by the economy."

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