Start with a Plan, Then Invest According to the Plan
July 20, 2000

Start with a Plan, Then Invest According to the Plan

Q. My husband is 51 and I'm 46. We have two children, one elementary school age and one junior high in a private school at about $450 a month for both. We own two houses, one a rental where the rent covers the payment exactly (we owe about $56,000 on it.) The other house payment is about $1,350 a month and we owe $134,000.

My husbands salary is $64,000 and I work part-time at about $7,000-$8,000 a year. Credit card debt is about $500, no car payments at the moment.

We have $450,000 in a money market account earning an average of about 4.5 percent to 5.5%. This money is from a windfall that will never happen again. We're very conservative and wonder what your advice would be as to how to invest it? And what do you think of money managers?

We would like to send our children to a private high school. This will cost about $8,500 a year per child, and then there's college. I am currently paying for tuition out of this money market account plus a few other monthly expenses. I'm afraid we're just going to spend it all on bills and taxes if we don't do some better planning.

---E.I., Dallas, TX


A. This is an area where a fee-only financial planner can really earn her keep, helping you create a structure for your plans and goals. Once you have the plan, a money manager can match the investments to the goals. A planner, for instance, could help you estimate future education expenses and then help you create a ladder of investments to make sure the money is there when you need it. You could, for instance, put money into a combination of taxable Treasury notes and I-Savings Bonds that would both increase your investment income and make part of it tax deferred. Money for college tuition could be invested in a tax-managed index fund such as Vanguard Tax Managed Growth and Income, minimizing current taxes while building future investment value.

Once you've created an education fund you'd also know how much of the original $450,000 could be added to a retirement fund.

Is there a reason I didn't mention money managers? No. But the primary problem here is a planning problem--- putting perspective on the money you have versus the commitments you have made.  


Q. I have been using money market funds for my bond holdings but recently I have been looking at higher-yield alternatives. I have noticed that the inflation-adjusted government savings bond yields over 7 percent currently and the tax on the interest income is deferred until bond redemption. As an alternative, one-year insured CDs offer similar yields without the tax advantages.

I am in the 31 percent federal tax bracket and my state taxes are 6 percent. I earn $100,000 per year and I am 33. I have $11,000 in an IRA and $45,000 in a 401k, invested half in money market and half in equity index funds. My 401k offers money market and a high-fee intermediate-term corporate bond fund for fixed income alternatives.

I have $100,000 in taxable accounts and the investment mix is half equity index funds and half money market.

I save aggressively (about $36,000 a year) and I plan on a simple retirement when I reach 40.

Which alternative makes the most sense: a CD ladder or government I-bonds if I want a 50 percent bond and 50 percent equity portfolio?

---B.V., Denver, CO


A. Using I-Savings Bonds in your taxable account is a good solution: you'll get a tax deferred yield far higher than most CD yields. In the current market you're just as well off using a competitive money market fund as an expensive intermediate corporate bond fund. Recently, for instance, the 30-day SEC yield on intermediate corporate bond funds averaged 5.84 percent according to Morningstar, the Chicago investment data and research firm. The Strong Money Market Fund, meanwhile, was 5.66 percent, not that much less.

Whether you can reach your goal of retiring at age 40 depends on what standard of living you want to maintain after retirement. Set it too high and you won't be able to accumulate enough money. Assuming that you have an average return of 9 percent on your investments, that you already have $156,000, and that you save $36,000 a year, you'll have about 20 years of income by age 40 if you keep your spending to around $40,000 a year.

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