Though his kids are still in grade school, Bob Pulley, a technical manager at a Massachusetts software firm, wants to know what he can do right now to ensure he can send them to college while funding an early retirement for himself and his wife.
That's a tall order, and we set it on the plate of financial adviser Keith Newcomb of
Luken Investment Group
in Brentwood, Tenn. Newcomb agreed to help the Pulleys as part of
inaugural Monthly Makeover feature, which replaces the
Portfolio Planners series that has run for the past year and a half.
Pulley, 44, who lives in Barrington, R.I., wants to retire after his eldest daughter, now 8, starts college -- sometime between ages 54 and 65, an 11-year span. He also has a 6-year-old daughter. Wife Laurel is staying home with the children, but she may return to the workplace once the girls are older, Pulley says.
The Pulleys' liquid assets, invested in a variety of stocks and mutual funds, hover around $320,000, though the couple expects a significant windfall if Bob's company, a networking software provider, either goes public or is bought out.
Newcomb, a former
broker who recently joined Luken, says the Pulley portfolio is a promising start. But at this point it looks like Bob will have to choose between his two goals, unless he hits a stock options bonanza. And choosing won't be easy. The value of a college education goes without saying. But early retirement also is important, Pulley says. He wants to leave the workplace before it takes a serious toll on his health. His mother died at age 54. Pulley describes himself as overweight and says he has a stressful job requiring an hour commute each way. He calls himself a classic Type A personality.
The Pulleys have about $200,000 in various tax-deferred retirement accounts and $85,000 in 15 stocks, mostly in technology companies that Bob manages himself. Another $15,000 is in cash.
Bob makes approximately $130,000 annually in salary. He puts 7% of it into a company-sponsored 401(k) retirement plan (the company matches his contributions up to 3% of his salary) and another $500 each month into the large-cap growth
American Century Ultra fund, which is held in a taxable account. Laurel, 42, has no retirement savings of her own.
Start With Estate Planning
Before tackling the particulars of the Pulley portfolio, Newcomb says the family could benefit from work on its financial infrastructure. "The structure is going to have a bigger impact on his financial picture than noodling around with the stocks," he says.
At the top of the list should be estate planning. The Pulleys need some kind of a trust that would allow survivors to bypass estate taxes completely. Though estate taxes don't kick in for estates of less than $675,000 for individuals or $1.35 million for couples, Bob should plan for the eventuality that his family assets could surpass that amount -- especially given the possibility of a windfall if his company goes public.
Newcomb suggests that the Pulleys have an attorney establish a credit shelter trust, which would take ownership of their assets when they die and exempt a significant portion from estate taxes. (For more on credit shelter trusts, see a
previous column by
Open Roth IRAs
Newcomb also recommends that the $500 per month Pulley is putting into the American Century Ultra fund be redirected into some kind of tax-free account. He suggests Roth IRAs for both Bob and his wife. The Pulleys aren't eligible for the traditional IRA because their adjusted gross income is more than $61,000. But each can contribute after-tax income to Roth IRAs, if they file their income taxes jointly and as long as the family's adjusted gross income remains below $160,000; eligibility to contribute is phased out between $150,000 and $160,000.
To provide for the children's education, the Pulleys have $15,000 socked way in a second taxable American Century Ultra account, to which they're no longer contributing. To meet those expenses, which Newcomb estimates to be $18,000 per year for each child in today's dollars, Newcomb says they need to start saving an additional $670 a month. Moreover, he says, the Pulleys should set up education IRAs that allow them to put away another $500 in after-tax dollars that can grow over time and be withdrawn tax-free for education expenses. It's not much, but every little bit helps, Newcomb says.
Other mutual funds in the Pulley portfolio are in various retirement accounts, the bulk in several
T. Rowe Price
funds in a 401(k) at Bob's old employer, which he left two years ago. He hasn't yet rolled those funds into his current 401(k) because he doesn't like the investment options.
Wrong move, Newcomb says. If Pulley's former employer goes out of business or changes plans, ex-employees will be the last to find out. It's best to roll those funds over into a self-directed IRA, if it's allowed. The money remains tax-deferred, and Pulley probably can keep the money in the same lineup of funds, if he wants to.
But if the Pulleys want to change the composition of the funds, Newcomb suggests toning down technology, which is overrepresented in the couple's current holdings. He suggests the following breakdown using a trio of funds investing in, respectively, large-cap, mid-cap and small-cap stocks: half in
MFS Strategic Growth, a quarter in
MFS Mid Cap Growth and a quarter in
MFS New Discovery. All three funds come with sizeable sales charges, but the strategy can be easily duplicated with a fund family that doesn't impose sales charges.
Diversify Stock Holdings
While Pulley describes his stock-investing strategy as fairly conservative because he doesn't buy on margin, Newcomb sees a tech-heavy portfolio that took a 20% hit during the
Nasdaq Composite Index swoon in the spring. Newcomb estimates that the Pulleys' overall tech weighting is about 47%, factoring in the mutual fund investments. And if Bob's stock options are added, the tech portion shoots up further.
There's also too much overlap between his stock and fund holdings, Newcomb says. "His favorite stocks are portfolio managers' favorites, too."
show up in a number of the funds that Pulley holds.
Further, Newcomb wonders whether Pulley is putting money into those stocks as an investment or simply for entertainment value. If it's for longer-term goals, it's better to let a fund manager take the reins because Bob hasn't demonstrated a clear investment strategy.
"The key is defining a strategy for entering and exiting the positions, rather than being a gunslinger, which Bob is now," Newcomb says.
If Pulley really enjoys investing on his own, he should do it with a smaller portion, say $50,000, Newcomb says. And he should diversify the holdings into health care, financials and retailers.
Finally, the Pulleys have $15,000 in cash. Newcomb says they should make two cash accounts, one for investing and another for an emergency fund. For an emergency fund he suggests enough to cover two to three months of expenses. The rest should be fully invested so the Pulleys have a better chance to meet their twin goals.
Would you like to participate in the Monthly Makeover? Send a note to
We'll need to know what stocks and funds you own and roughly what percentage of your portfolio they constitute. We also need to know a little bit about your investing goals. If we select your portfolio, we'll ask a professional financial adviser to give it a makeover.
Remember, this exercise will be conducted in public, in front of all of our readers. So if you're squeamish about making your financial life public, this probably isn't for you.