I am a minister with approximately $70,000 in assets. My wife and I are both in our mid-40s and want to retire at the typical 60-to-65 age bracket. We have three children; two are teenagers and one is a preteen. Our household income is approximately $18,000. We have free housing now but hope to buy a home (in the $75,000 range) in the next three to 10 years. I hope to save and invest enough to put 50% to 75% down on a home. Much of the investment we have came through an inheritance. We have tried to balance our investments by investing in both technology and conventional stocks while avoiding investing in companies involved in the production, sale or marketing of alcohol or tobacco products. As a minister, I've opted out of Social Security but have worked enough quarters to qualify for some benefits. I will not receive a pension from any church. Of our current investments, only about $7,629 is in an IRA account. Each year we try to shift some of our other money over to the IRA account. We are able to save about $1,000 annually. How do we look? --S.S.
It's been a tough year for the stocks and funds in your portfolio. Your best performers on a year-to-date basis are
American Century GNMA, a bond fund, and
. But, as the chart below shows, Cisco has earned its keep over the past five years with total returns five times that of the
Nasdaq Composite Index
Now that the stock is fully one-third of your portfolio, it's time to rebalance and increase the portfolio's diversification. That's especially important when you consider that just three investments account for more than 80% of your portfolio.
I would definitely throttle back on at least the two largest positions. When your investments get too concentrated, you're taking on too much risk. I don't like any stock or mutual fund position constituting more than 20% of a portfolio. The only real exception I would make to that would be a well-diversified mutual fund, like an index fund. You'll have to pay taxes on your gains when you sell, so plan ahead. Work with a tax adviser if you're concerned about minimizing the tax impact of these sales.
Normally, I'd recommend that you move out of the
American Century Equity Growth fund in the IRA account and replace it with a no-load index fund. Your preference to avoid investing in tobacco and alcohol companies has me reviewing other options. The
Social Investment Forum screens mutual funds for different social concerns, allowing you to choose from funds that don't invest in companies whose products or services you find objectionable. It also provides performance figures for the funds. Do some shopping among these stock funds. Find funds that meet your criteria on the SIF site, the research them on
TheStreet.com or on
Morningstar.com. Try to find no-load funds with low annual expenses.
What should you do with the proceeds from selling part of your Cisco holdings? Consider investments in the financial sector, energy stocks or health care. I'd rather see you in a mutual fund with an emphasis on one of these sectors than in individual stocks, but I don't think your portfolio has to be made up of all funds.
If you don't have a copy of your Social Security statement, you should request one. You can make the request on the
Social Security Administration
Web site. The statement will estimate your future Social Security benefits and provide a history of the taxes you've paid. The annuity board of the
Southern Baptist Convention
Web page that taught me a lot about ministers and Social Security. I now know enough to know that I can't adequately advise you on this matter.
How are you doing? Well, if your portfolio averages 8% and you put aside $1,000 annually for retirement, you'll end up with about $360,000 in 20 years. If the portfolio averages 10% it will be just over half a million. (This projection ignores taxes due on investment income and realized gains.) Would I like you to have more put aside? Yes. Will the portfolio meet your needs in retirement? It's going to be tight. It will be determined in large part by how affordable your housing expenses will be in retirement and what Social Security benefits you'll receive. While we're estimating how much your portfolio will be worth 20 years from now, let's take a look at your living expenses. You currently have a household income of $18,000 annually and expect to spend $17,000 of it on expenses, investing $1,000. You'll be empty nesters in less than a decade, but let's ignore that change for now. Your $17,000 in annual expenses will grow to $30,700 in 20 years if we factor in 3% inflation over that time -- and that's without housing expenses.
The real gamble is deciding whether to take part of your portfolio and invest in a home. With the leverage inherent in a mortgage and the potential appreciation in your home's value, you'll have a chance to realize returns that would keep pace with returns earned over time in the stock market. Overall, I think you have a better chance for higher returns in the financial markets than in the real estate market, but real estate varies so much by region that I can't say that with authority. Parting thought: When's the last time you asked your congregation for a raise?
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Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at