:: Consider more aggressive portfolio
Slow and steady isn't a bad thing, says Ray Ferrara, a financial planner in Clearwater, Fla. But the Williamses' portfolio is so conservative that it might not produce enough growth to achieve their goals.
THE WILLIAMSES' PORTFOLIO: Reservists save, invest carefully
"They will get slow and steady," Ferrara says, "but what they won't get is the ability to live well off their retirement accounts and Social Security."
The Williamses have 72% of their retirement portfolio invested in bank accounts, money market securities and bond funds. Ferrara estimates that their portfolio mix will generate average returns of 6.75% to 7% annually.
FIND MORE STORIES IN: CDS | Williamses | Ray Ferrara
Being so conservative carries its own risks. "Their assets are not likely to grow fast enough to keep pace with inflation and let them get to where they want to be financially," Ferrara says. "It's a prescription for disaster."
Their portfolio also includes 5% in real estate, 4.5% in foreign stocks, 1% in small-cap stocks and 11% in large-company stocks. Ferrara would set their asset allocation at:
• 10% in cash.
• 10% real estate.
• 10% in foreign stocks.
• 5% small-company stocks.
• 25% large-company stocks.
• 40% bonds.
"That's (still) a very conservative portfolio," Ferrara says. If they're comfortable with the new allocation, they should eventually consider a portfolio that has 60% stocks, instead of 50%. Even that is considered a fairly conservative overall mix.
As busy people, Eugene and Tracy should probably consolidate their accounts to make record-keeping simple and more efficient — and to reduce their fees. "They have five CDs in five banks," Ferrara says. "Unless there's a reason to leave money in those accounts, it's best to consolidate."
If they do move their accounts to one bank, the Williamses should "ladder" their CDs. One strategy is to divide their CD money into four parts and take out a new CD every three months.
Eventually, they will have one CD rolling over every three months, giving them the opportunity to spend or reinvest their money every three months.
Another strategy: Divide the CD money into four parts again but invest in CDs of different maturities. That way, the Williamses would receive an average of current rates. If rates start to fall, they can convert their short-term CDs into longer-term, higher-yielding CDs.
Similarly, the Williamses have several checking and savings accounts. They should probably merge them into one or two accounts, Ferrara says.
Not only would this strategy streamline their finances, it would probably also save them money in bank fees.
One suggestion: a credit union. Typically, credit unions offer higher yields on checking and savings accounts than commercial banks do. Credit unions also usually charge less for loans than banks do.
Tracy and Eugene have about $15,000 in credit card debt, most of which is on low-interest cards from USAA. They're paying $500 a month as part of a plan to get rid of the debt.
A better plan, Ferrara says: Pay off the debt with their savings. Currently, they're earning about 5% on their CDs and savings accounts. After taxes, they're getting about 3.5%. Even a low-interest credit card will charge 7% to 10% a year. "Without question, it will be advantageous for them to take some cash and retire their debt," Ferarra says.
If they feel uncomfortable with a smaller cash stash, the Williamses should consider a home equity loan, Ferarra says.
"The interest rate would be lower than the rate charged by the credit cards, and the interest would be deductible from federal income taxes," he says.
