Disciplined savers who still took a hit

Disciplined savers who still took a hit

This young couple thrived by investing in target-date funds in their retirement accounts. Then came the crash.

By Yuval Rosenberg, Money Magazine contributing writer
February 19, 2009: 4:39 AM ET




(Money Magazine) -- Nathan and Stacey Zee have always been good with
money. Diligent savers since their early twenties, the young Arlington,
Va. couple used to hold monthly budget meetings - just the two of them
- to review their spending and investments.These days, Nathan,
39, e-mails Stacey, 35, a summary of their investments once a month,
and the two, who both work for the government, discuss their goals
annually, around the date of their wedding anniversary.One
reason they're so disciplined is that they've kept their investing plan
remarkably simple. They invest exclusively through low-cost target-date
funds because the Zees view these all-in-one portfolios as the easiest
way to maintain their asset-allocation strategy. It's no wonder the
couple had managed, at one point, to amass nearly $500,000 in their
nest egg.Unfortunately, discipline and simplicity couldn't
protect them from last year's crash, which wiped out more than a third
of their investments.The pair haven't lost faith in the market,
though Nathan admits, "If I needed this money anytime soon, I would be
really stressed out." Yet with their first child on the way, college
savings to consider now and hopes of retiring in around 20 years, the
Zees want to know if they need to re-examine their goals and strategies.Where they are now
Combined,
Nathan, a technology process specialist for the Defense Department, and
Stacey, who works on a commercial space project for the Federal
Aviation Administration, earn $250,000 a year. They contribute the
maximum ($15,500 per person in 2008) to their government thrift savings
plans (TSP) as well as to their IRAs. They also have $250,000 in cash
they're using to build an addition onto their $600,000 home. As for
debts, all they have are their mortgages - a $379,000 loan on their
house and $250,000 on a condo they bought as an investment property.What they should do
Stick with their targets. In their IRA, the Zees have all their money in the Vanguard Target Retirement 2040 fund (VFORX),
which exposes them to a mix of domestic and foreign stock funds as well
as bonds. The fund also rebalances for them and gradually grows more
conservative over time. This hassle-free approach is why they like the
fund. Financial planner Annette Simon of Garnet Group in Bethesda, Md.
says that while she prefers to construct a customized portfolio, this
low-cost off-the-shelf option - along with a similar fund they use in
their TSPs - is a fine choice.But the couple must make sure they
remain comfortable with the fund's strategy. Though the Zees want to
retire in 2030, they chose the 2040 fund because of its greater equity
stake (90%). The planner says that's not unreasonable, since they're
young. Even after this downturn, Stacey says she and Nathan are
comfortable being aggressive. "We ride the ups and downs through
dollar-cost averaging," she says. But if their tolerance for risk ever
changes, they need to revisit which target-date fund to use.Sell their condo.
The Zees bought a property in 2006 in nearby Silver Spring, Md. to take
a stab at being landlords. The move hasn't really worked out, as the
couple are hemorrhaging $400 a month on the condo after the mortgage
and expenses. Simon says they should keep an eye on the market and look
to sell once their renter's lease expires this year.Whatever
they can earn on an eventual sale - and the $400 they'd save each month
- could be used to boost college savings. They are now socking away
$100 a month in a 529 account in Nathan's name, which will be
transferred to their child later. But Simon notes that "at $100 a
month, their college savings will cover less than one year of private
college."Broaden their portfolio. The freed up cash
should also be used to boost their overall retirement savings, the
planner says. While Nathan and Stacey max out on their tax-deferred
investing plans, they have the capacity to save more.Rather than
let that additional money sit, say, in cash, the Zees should open up a
taxable investment account to supplement their TSPs. Not only will such
an account give them access to a broader array of investment options,
there are at times some added benefits. For example, investors in
taxable accounts were able to get some tax relief after last year's
crash by selling money-losing stocks - and using the losses to offset
gains or up to $3,000 of ordinary income.Nathan likes the idea.
Had he and Stacey not bought their condo, they might have started a
taxable portfolio earlier, he says. "When we sell the condo, we will
definitely take her advice."The makeover

• The problem: They've been diligent investors, sticking with low-cost, diversified funds. Yet their nest egg still lost a third of its value.
  
• The plan: Give their plan time to Recover - and keep dollar-cost averaging into their target-date funds.
  
• The payoff: Because target-date funds automatically rebalance for them, this is a simple way to stick to their asset-allocation strategy.
  
• The problem: They are bleeding $400 a month on the condo they bought as an investment property.
  
• The plan: Consider selling the property once the lease for the current tenant expires.
  
• The payoff: The freed up cash can be used to boost their college savings through a 529 plan.
  
• The problem: They can invest more for retirement, but they limit themselves to tax-deferred accounts.
  
• The plan: After maxing out on their tax-deferred retirement plans, open a taxable investment account.
  
• The payoff: This way they can boost their overall savings rate and gain access to a broader array of fund choices.