I’m back to share part 2 of my experience with a fee-only certified financial planner. You can read part 1 here. In this post I’ll cover the planning session and the recommendations that were made.
When we left off, financial planner John Gay, of Frisco Financial Planning, had given Mrs PT and I several items to complete and pass over to him. John spent a few days with that material and then was ready to meet to discuss our retirement. Prior to our meeting, John sent us our full planning report, which contained:
- Asset Allocation and Investments
- Risk Tolerance
- Lifetime Income Planning
- College Education Funding
- Appendix (fund recommendations, life insurance information, and general info)
I took a quick glance at the report, but I didn’t get much time to do a full review prior to meeting with John. I showed up to John’s office on a Friday afternoon and was prepared to spend a couple of hours going through the nuts and bolts. I dialed Mrs. PT in on conference call, as she had to be home with the little one. John was nice enough to work with us in this capacity. Probably not ideal for him, but he made it work. Anyway, our first order of business was to review our individual risk tolerance scores.
Our Risk Tolerance
If you remember from part one, we each took a risk profile assessment to evaluate our risk tolerance. The assessment was around 25 or so questions. John revealed our scores and also went over some of the questions where Mrs. PT and I disagreed the most.
As you can see by the charts below, I scored in the average range (52), whereas Mrs. PT scored very low (30) with regard to risk tolerance. I knew she was conservative. But man, did I underestimate by how much! Looking back on the survey, Mrs. PT said that there were some financial terms and concepts that she didn’t fully understand while taking the survey and that this may have affected her results slightly.
However, she stands by her conservative stance and feels like the survey had a needed effect on our allocation. Especially based on our current situation: stay at home mom, self-employed income, baby on the way, etc.
The software that John uses takes our combined risk tolerance scores and created an asset allocation that aligns with our feelings toward investment risk. Here are the results:
Proposed Asset Allocation
A more simple way to present this would be to say that we should be investing 60% in stocks, 30% in bonds, and 10% in cash equivalents. John showed us a retirement projection using this allocation, our current assets, and expected future contributions. I don’t have a picture of that chart, but I can tell you that the model produced good results. In most cases, using the new allocation, we’re on track for a solid retirement.
So where are we right now? Well, our current asset allocation is far more aggressive than this. We have most of our retirement assets in stocks, with under 10% in bonds. Our biggest fund is the Vanguard Target Retirement 2040 Fund (VFORX), which has the following allocation:
Most of our other funds are stock-only index funds. Our total current allocation across all funds is probably somewhere around 93% stocks, 7% bonds. That’s a far cry from the allocation proposed.
What this tells you is that I’ve been making most of the retirement investing choices without much regard for Mrs. PT. It appears as though I have some adjustments to make so that our investments reflect our risk tolerance.
John then goes on to suggest some funds for us to achieve the proper allocation (John loves the ETF):
Large Cap Stock Fund – SPDR S&P 500 ETF (SPY)
Small Cap Stock Fund – Vanguard Small Cap ETF (VB)
International Stock Fund – Vanguard Europe Pacific ETF
Taxable Bond Fund – Vanguard Total Bond Market ETF (BND)
Inflation-Indexed Bond Fund – Barclays TIPS Bond ETF (TIP)
Municipal Bond Fund – ishares S&P Natl. Muni Bond ETF (MUB), SPDR Barclays Short-Term Muni Bond ETF (SHM)
Real Estate (REIT) Fund – (VEA) Vanguard REIT ETF (VNQ)
Energy/Commodities Fund – Vanguard Energy ETF (VDE)
Cash Equivalent Funds – Taxable Treasury Money Market Fund, SPDR Barclays Capital 1-3 mo T-Bill ETF (BIL)
John said that for each of our investment accounts that are over $10,000 (in our case, a Rollover IRA) we should shoot to have these investments. For the accounts at or below 10K (our Roth IRAs, a Traditional IRA, and some misc. funds) we should just pick a Vanguard Target Retirement Fund that mirrors the 60/30/10 allocation. Over the next couple of weeks I’ll aim to get this completed.
John’s session included a discussion of life insurance and college education funding for our kids. I’ll save that info for another post, but I can tell you that John was spot on with his recommendations for term life insurance and 529 college savings plans.
Finally, John stressed the need to build our emergency fund to a level more suitable for a self-employed, sole bread winner. Basically, we need to do all we can to build up a bigger cash cushion before we progress much further in our retirement investments. I couldn’t agree more. Right now we have around 6 months worth of living expenses saved up. He suggests up to 18 months worth. It’s hard for me to argue against a bigger e-fund.
A huge thanks to John for allowing me to go through this process. I left more confident about our financial future and Mrs. PT and I now have a better grip on how to direct future investments. If you would like to see if his services are right for you, I encourage you to visit him at Frisco Financial Planning.