Balance is what he’s seeking.
“I tend to be a simple man who enjoys the comfort of home,” he says. “I don’t want to have to think about spending money to go out for an evening. Basically, I don’t want to be in debt over my head.”
Bart’s a longtime renter, but he’s wondering if buying a home is a smarter choice for his housing payments. He’s also wondering if his saving and investment strategies are right for where he is now, and where he hopes to be in retirement.
Bart, whose name has been changed, has saved $305,800 in 401(k) plans, $128,000 in mutual funds, $16,000 in savings and $1,000 in checking. His only debt is his car loan, and he pays child support for his 11-year-old son, for whom he’s not required to pay future college costs.
The Star-Ledger asked Margaret O’Meara, a certified financial planner with O’Meara Financial Group in Red Bank, to examine Bart’s budget and savings, address his specific questions and see what he can do better.
“Bart has done an impressive job of saving for retirement and building up after-tax assets,” she says. “The forced savings through work retirement accounts and outside mutual fund companies has paid off as he will have a very comfortable retirement if he continues to save in this way.”
She says Bart has $16,000 in liquid assets, which amounts to a little more than three months of expenses. She says because his job is fairly secure, that amount should be okay for his emergency fund.
“Bart may want to consider saving another $12,000 or so in case of emergencies or job loss, as it is taking folks a long time to replace lost jobs,” O’Meara says.
The amount may also change if he decides to buy a home, which is the next question O’Meara addressed.
Her projections found that buying rather than renting was clearly the better long-term decision, based on a purchase price of $300,000 for a home or condo with a 20 percent down payment.
She favors a purchase instead of renting for several reasons.
First, mortgage rates are low, and a fixed-rate loan will mean the same monthly payment, while rent payments will go up with inflation over time.
Buying would also mean building equity for the future, she says.
“The home is like a built-in savings plan and he will be building equity and value for the future, unlike renting, where you have nothing at the end,” she says. “Interest and tax payments are generally tax deductible — he should check with his accountant regarding his situation specifically — so he will save taxes by owning a home.”
Turning to retirement planning, O’Meara says if Bart stops work at his normal retirement age of 67, he should have enough money to continue his standard of living until age 90. This retirement scenario assumes that his savings levels remain the same, that he achieves a 7 percent rate of return over time, his expenses stay level and Social Security remains the same based on current projections.
If Bart’s budget leaves him with extra money at the end of the year, she recommends he contribute to a Roth IRA.
Or, he could move money from his taxable mutual fund account into a Roth.
“He’d never pay tax on future earnings as long as the Roth IRA stays in place for five years and he doesn’t take any withdrawals prior to being 59½ years old,” she says. “This is the type of retirement account that would be great to set up next.”
Once the Roth IRA is set up, if he has additional discretionary cash, he could boost his employer retirement plan contributions from the current 11 percent level.
Bart currently saves $550 a month to his after-tax mutual fund account, and he’s wondering if there is a better way for him to save.
O’Meara says it’s a good savings level, and that pot of cash will make sure he has funding for future purchases, such as a home down payment. Additionally, these after-tax accounts can be liquidated quickly and without penalty, unlike retirement accounts.
“Forced saving like this is great and gives you a good nest egg that is in addition to retirement savings,” she says.
Exactly where all the money for retirement and in the mutual funds is invested is an area that needs improvement, O’Meara says.
She says there’s a lot of investment overlap in his accounts, and he needs to make sure he’s properly diversified.
Plus, Bart says his risk tolerance is a 7.5 out of 10, but his portfolio is about a 9 out of 10, O’Meara says, considering that less than 10 percent of his portfolio assets are in fixed income and/or cash.
Right now, 84 percent of the investments are in large-cap stocks, with about half having a value bent and half in growth.
“Bart may want to think about being more aggressive in the retirement accounts which he should hold onto for longer and draw down last,” she says.
She also recommends he consider some small- and mid-cap domestic stock funds because they have outperformed large-caps over time.
“The United States markets have been very strong in the last couple of years, but at some point international will gain favor again and it would be good to have more foreign funds in his portfolio as well,” O’Meara says.
For shorter-term savings — such as the money he could use for a home down payment — Bart may want to be more conservative and invest in a balanced fund or have more cash on hand, she suggests.