PERFECT YOUR PORTFOLIO Taking on Risk to Achieve Extra Growth by Jeffrey R. Kosnett
In a sense, Jennifer Tomka has it easy. An assistant attorney general for the state of Nebraska, Jennifer, 38, has all of her retirement assets in a state-sponsored pension that she directs. Her 14 investment options may seem like a lot, but the choices are restricted to index funds, prepackaged combinations of index funds and fixed-rate accounts. Jennifer's challenge is to assemble a growth-oriented portfolio that will provide adequate income for her in retirement. She also needs to complement the state plan's limited menu.
Jennifer lives in Lincoln with her husband, Scott, a manager at an automobile dealership. The Tomkas, who have no children, handle their own retirement savings. For Jennifer, that amounts to $23,200 in the state employee retirement system. Because hers is a defined-contribution pension, her retirement benefit depends on how much she and the state set aside, and her investment results. Unlike contributions made to a company-sponsored 401(k), in which participation is voluntary, both Jennifer's and the state's contributions are compulsory and are based on a formula pegged to her annual salary, about $50,000. For now, Nebraska puts in $265 a month and Jennifer $170. Both figures rise with her pay.
Jennifer has a simple goal: "I want to make all the money I can." But to reach, say, $750,000 by 67, she must earn around 7.5% per year (assuming increasing contributions as her salary rises). That's doable, but she'd be wise to invest a few thousand a year outside her pension. That expands her choices beyond index funds.
Not afraid of risk
As befits someone decades from retirement, Jennifer is placing most of her assets in stock funds. All told, she has 72% in large-company stocks (mostly in a fund that tracks Standard & Poor's 500-stock index), 15% in bonds, 9% in small-company stocks and 4% in foreign stocks.
Ray Nasser, a financial adviser in Richmond, Va., suggests that Jennifer gradually cut her large-company allotment by devoting a fourth of all new contributions to the small-company index fund and 15% to the overseas index fund. He figures that a mix of 46% in large companies, 24% in small ones, 15% in foreign names and 15% in bonds can return 10% a year over the long haul.
Meanwhile, Jennifer soon hopes to establish other accounts, something she has had to delay because of education debts. She can elect to have some of her salary deferred and invested in a state-run selection of the same index funds. Or better yet, says Tom Velevis, an adviser from Southern Pines, N.C., she should invest $3,000 a year in a Roth IRA. She could start with Meridian Growth, which invests in fast-growing midsize com-panies, and a real estate fund, such as Third Avenue Real Estate Value. Later, as the Roth grows, she can add a few other funds. If Jennifer maxes out the Roth and earns 8% a year tax-free on top of her state account, she could be worth a million bucks by retirement.
MAGAZINE
