Couple needs to take more risk with $455,000 savings

Paul and Linda Schilling, ages 60 and 59, Coral Springs, Fla.

NEW YORK (Money Magazine)

In 16 years of managing a successful UPS store six days a week, the couple have rarely been able to take more than a day off work at a time or see their favorite Florida Gators college football team play, never mind plan a real vacation.

"We want to travel while we're still healthy," says Linda. They would like to retire in six years -- or sooner -- and hope to begin taking two big trips a year.

With retirement in sight, though, the ups and downs of the stock market are making them nervous. "After clawing our way back from the crash, we've become much more conservative," says Paul. And how.

Their once stock-heavy portfolio -- which had lost 65% of its value at one point during the 2007-09 downturn -- is now almost all in cash. The couple aren't sure how to give themselves some potential for growth without taking on too much risk.

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Otherwise, the Schillings have been pounding away at their goal.

After their son, Stephen, now 29, graduated from college, the Schillings began socking away as much as 15% of their annual income. Their small mortgage and car loan will be paid off within four years. And they expect to sell their business for at least $200,000.

Occupations: Together own and operate a UPS store franchise

Goals: To make savings last in retirement and afford frequent travel

Total income: $134,000

Total assets: $905,000

Retirement savings: $455,000; Home equity: $230,000; Cash: $20,000; Value of business: $200,000

THE PROBLEM

One word: inflation. With their savings in cash, "Paul and Linda will have a negative return as inflation eats away at their principal," says Ben Tobias, a financial planner in Plantation, Fla.

THE ADVICE

Add stocks. Despite an impressive savings rate, the Schillings will have difficulty funding a long retirement with their current investments.

Tobias suggests a conservative 28% stock/72% bond mix mostly made up of intermediate-and short-term bonds and large-cap U.S. stocks.

Though nervous, Paul and Linda say they're open to diversifying. "Ben makes a good argument," Paul says.

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Adding the cash from the sale of the business and their expected $50,000 Social Security benefit, Tobias projects the Schillings can afford to retire in six years, withdrawing 4.6% from their portfolio initially and less later on when they scale back on travel expenditures.

Buy long-term-care insurance. Tobias says he doesn't advise most of his clients to get this pricey coverage, but the Schillings are an exception.

"They have enough assets to protect but not enough to self-insure," he says, noting that an extended long stay in a long-term-care facility for one of them could wipe out all their savings for the other.

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Paul balks at a policy that could cost more than $6,200 a year, but long-term-care specialist William Dyess says they can save $1,000 a year by scaling down the policy, choosing, for example, to extend the waiting period for benefits from 30 to 60 days.

Hang on to the home. Paul and Linda don't want to move out of their four-bedroom home, valued at about $270,000.

That's fine for now, says Tobias. If the couple get to their seventies and find that their financial picture isn't as bright as they thought it would be, they could downsize to beef up their savings. Says Tobias: "The home is their ace in the hole."

Taking a little more risk

By holding a diversified mix of stocks and bonds instead of all cash, the Schillings can increase the chances they'll be able to replace 78% of their current income over 30 years.

	Cash	Bonds	U.S. stocks	International stocks	Chance portfolio will last 35 years
Current portfolio	97%	0%	0%	3%	40%
Recommended	2%	70%	28%	0%	93%

NOTE: Assumes 4.6% initial withdrawal rate and less thereafter; 4.7% annualized return, and 3% annual inflation. SOURCE: Ben Tobias, Tobias Financial Advisors

First Published: January 23, 2013: 6:20 AM ET

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