I am 41, my husband is 39, and we have two children 3 and 7 years old. Our combined annual income is $170,000. We have been maximizing our 401(k) plans for several years to build a solid retirement base. We have determined that our family life is way too stressed, and I am planning either to quit work or drop to 20 or fewer hours a week. This will drop our gross income by as much as $70,000. I have tried to get my husband to diversify but he gives me an "I told you so" every time our quarterly results are compared. My 401(k) was twice the size of his three years ago. His fund has been awesome! Our home is worth about $170,000 and we have equity of $40,000. We have no other debt. I think we will be able to live comfortably, including private school for the kids, on his income. Both children have four-year state prepaid college contracts in Florida. He is still a tad nervous about our financial security if I leave the workforce. Also, I am concerned about our portfolio mix and wonder where we stand financially. Are we in good shape, great shape or bad shape? I really don't know. I was thinking we would reduce his 401(k) contributions to 6%, the amount needed to get the maximum 4% company match. -- A.O.
As for how you're doing, you're doing well. To have a net worth of close to $600,000 in your early 40s with the children's college tuition paid, and being debt free except for your mortgage is a remarkable accomplishment. I'll have a few suggestions for your portfolio, but I won't be chiding you for not having put more money aside.
Financial planning isn't just about investing to meet future goals. It's also about helping you live the life you want to live today. The decision that you won't work full time is as much a financial goal as your goals for retirement and college for the children. But unless you plan on to withdraw funds from the portfolio to finance your household expenses, the answer to whether you can afford to lose the income comes down to a budgeting exercise.
You've shown you can live within your means in a two-income household. How does your budget change with the loss of the income from your job? You and your husband are going to have to redefine what living well means. You're valuing the change in lifestyle as being worth more than the change in household income. It's a decision that a lot of couples, especially with young children, make in trying to improve the quality of their lives. To help both of you gain confidence that you can make ends meet, you need to build a budget. Whether you use a spreadsheet or budgeting software, anything that lays out income and expenses in a way that you're comfortable with should do the trick.
Having your husband reduce his 401(k) contributions to the point where he is maximizing the company's matching contributions is reasonable, given what you're trying to accomplish. I understand why he's feeling smug about the performance of
Vanguard Primecap in his 401(k), but that holding is more than one-third of your overall portfolio. If he's going to continue holding that one fund and invest another $10,000 annually, you'll need to adjust for that concentration by making some changes in your holdings.
First, stay current in how the fund is invested. At the end of September the fund was predominately invested in technology, services (which includes telecom) and health -- with a big cash holding (12.5%) to boot. If your funds are also heavily weighted in these areas, too much of the portfolio's returns would be dependent on these sectors, increasing the risk of the portfolio.
Also, with both stock funds and bond funds in your 401(k) account, I don't see the need for a balanced account like
Fidelity Puritan. I think balanced funds are best used in small portfolios that want some fixed-income investments without holding multiple funds.
I like the mid-cap exposure you've given the portfolio. You positioned the portfolio to capture the gains in that group over the past year. That, combined with your mix of value and growth investments, will serve you well as a long-term investor.
Still, I think you own too many funds. When you own too many funds, the net effect is often close to what you would have earned holding an index fund. You own a bond index fund, a stock index fund and the
T. Rowe Price Blue Chip Growth fund, which
calls "a good index substitute." You've got two mid-cap growth funds. One is earning its keep and one isn't. Sell the one that isn't. Several of your funds own foreign stocks, but I think there's room in the portfolio for an international fund.
Do some shopping. I did and put
Tweedy, Browne Global Value on your shopping list. When you're shopping for funds, make sure you review their holdings. I came across a fund,
CSI Equity, that had done better than most international funds. Then I found that its top-five holdings were
. Other than Nokia, those aren't holdings most investors would look for when shopping for a international equity fund.
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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