When You Need a Slight Course Correction

Sometimes no action may be the best action.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, February 2005

Karen and Jim Johnson fear that they've missed a turn or two on the road to financial freedom. They wonder whether now is the time to take on more risk by, for example, refinancing their house to pull out some money to invest in the stock market. In this case, though, they may be wise to stand pat.

Jim and Karen have $250,000 in retirement savings and $150,000 in equity in a suburban Omaha home that's worth $300,000. But with only $20,000 in college savings for sons Cory, 14, and Erik, 12, Karen is questioning her cautious ways. "I've always been debt-averse," says Karen, 43. "Maybe even too much so."

If Karen seems concerned, it may be because the family's savings plan has hit a snag. She earns enough as an IT professional at Hewlett-Packard to pay the bills. But Jim, 48, has been job-hunting since spring, when he sold his business, a franchise that sells promotional items bearing company logos.

College or retirement

With HP's match, Karen contributes about $10,000 a year to her 401(k). But the Johnsons have not added much to the college fund, which doubles as their emergency reserve.

The Johnsons face a common quandary: Should they scramble to catch up with college savings, or put aside what they can for retirement? The answer: Retirement should come first. There are scholarships, loans and work-study jobs for students, but you can't borrow for retirement. And saving becomes more difficult once you stop working.

Fortunately, the Johnsons' retirement plan is in good shape. They need only to tweak their portfolio, which is mainly in Fidelity and Vanguard index funds. Karen has $37,500 of her 401(k) in Vanguard U.S. Growth, a lemon. She should transfer that money to the index funds. Jim has $38,000 of his IRA in Pioneer Emerging Markets. That's too much in so volatile a fund. He can keep $10,000 in Pioneer and move the rest to a medium-term bond fund. That would put the couple's portfolio at about 80% in stocks and 20% in bonds.

Steady course

For the Johnson family, the key is discipline, says Randall Cooper, of Life Transition Planning, in Tampa, Fla. One of Karen's fears is that she won't be able to retire at age 62 or earlier, as she has long planned. If Karen and Jim each set aside $10,000 a year and average 8% returns on new and existing investments, they'll amass $1.3 million in 14 years, when Jim is 62 and Karen is 57.

As for refinancing -- not a good idea. With 12 years left on their 5% fixed-rate mortgage, the Johnsons will own their home free and clear before they retire, if they don't refinance. That's important, because neither Jim nor Karen will have a large pension. John Scherer, of Trinity Financial Planning, in Madison, Wis., says, "They are on solid ground. If you're antsy that you need to do something, that's when you are most likely to go wrong."

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