The Road To Financial Freedom - Brief Article

Black Enterprise, Sept, 2001 by Carolyn M. Brown

To fund her and her husband's retirement and their son's college education, Theresa Reed engages in a comprehensive investment strategy

IT WAS THE BIRTH OF HER SON, AQUAYLIS, THAT started Theresa Reed investing 14 years ago. She bought U.S. Savings Bonds, as well as shares of individual stocks and mutual funds. Realizing that "you can't time the market, I used dollar-cost-averaging," says Reed, describing a system by which she regularly purchased shares regardless of their price. This way, the average price of an investment works out to be less over time.

Most recently, Reed has been contributing $200 to $300 a month through Websites such as BuyandHold.com and Sharebuilder.com, which allow investors to buy fractional shares of stock. For instance, someone can purchase $25 worth of Clorox stock (NYSE: CLX) every third Tuesday of the month.

Reed's husband, Erwin, 43, invests mostly through his company's stock-purchase plans; he is a maintenance technician with Abbott Laboratories. Reed, who will have taught public school for some 22 years this fall, has a 403(b) retirement plan with the state of North Carolina. "I am trying to go 30 years so that I call get my benefits," she jests.

THE ADVICE

The 43-year-old wife and mother will be eligible for retirement in eight years. Based on the Rule of 72, if she averages a compound rate of return of about 12% a year on her investments, she should have about $1.2 million within the next six years. (To calculate how many years it will take your investment to double using the Rule of 72, divide 72 by the percentage of the compound annual rate of return.)

While she currently has more than a half a million dollars in assets, Reed says her goal is to be debt-free and get Aquaylis on the right financial track so that he can earn a college degree in engineering. To help Reed and her family achieve their financial goals, BLACK ENTERPRISE had them consult with Chicago-based Pierre Dunagan, a financial advisor and principal of The Dunagan Group. He based his recommendations on the Reeds' aggressive approach to stocks and high tolerance for risk.

* Diversify within company retirement plan. At press time Erwin had $600,000 worth of Abbott stock between the Company Retirement/Compensation Package and employee stock options. In general, says Dunagan, you should not have more than 25% of your assets in any one stock or mutual fund. Erwin should take the amount of money that is not the company match and diversify it into mutual funds. Thus, if half of his holdings ($300,000) represents the money he himself put in over the years, he should split that amount between three different mutual fund classes: growth stock, aggressive growth stock, and growth and income. Reed is well diversified with annuity choices and small-cap, midcap, and large-cap mutual funds within her 403(b).

* Reduce the number of individual stock holdings. The couple has positions in 14 different companies. Instead, they should focus on building up six core stocks: Walgreen Co. (NYSE: WAG), McDonald's Corp. (NYSE: MCD), Verizon Communications (NYSE: VZ), Microsoft Corp. (Nasdaq: MSFT), BB&T Corp. (NYSE: BBT), and Walt Disney Co. (NYSE: DIS). This would allow the couple to keep some of the stocks they own and diversify within sectors. Right now, they have a little bit of money scattered across too many stocks and mutual funds (e.g., $100 worth of American Tower Corp. (NYSE: AMT), $2,000 invested in six other companies, another $500 invested in four other stocks, and $100 in an Alger growth fund).

* Consolidate mutual funds. She owns shares in three different mutual funds to which she is not adding a significant amount of money. She also has too many small-cap funds all doing the same thing. She should consolidate the funds in her Roth IRA because of the tax advantage it offers. After five years, all the capital gains become tax-free. But if she withdraws the money before she is 591/2, she will have to pay a 10% penalty on the capital gains. Dunagan suggests she put all of her mutual fund money into the Putnam fund holding in her Roth IRA.

* Increase life insurance policies. She should boost her life insurance from $100,000 to $500,000. In the event of her untimely death, this would generate enough money to replace her income after taxes. He has about $200,000 in life insurance, which is adequate because it something were to happen to him, she could roll over his Company Retirement/Compensation Package money and live off of the interest. Since she has a permanent Universal Life Insurance policy, she should get a $400,000 term rider attached to it, but only for eight years, at which point she would be eligible for her pension.

* Contribute to 529 College Savings Plan. The Reeds have $1,000 in an Education IRA and were thinking of using some of their stock holdings to finance their son's college education. "They need a more definitive plan," says Dunagan. They should sell some of the Abbott stock to pay off the $25,000 credit card debt and then use the extra money--about $500 a month--to fund a 529 College Savings Plan. Yeti can put up to $50,000 in one year and up to $247,000 over the course of the plan. The money grows tax-free, and if Aquaylis doesn't go to college, the Reeds can change the plan's beneficiary.