My Sister's Retirement - A Detailed Case Study!

My sister asked me to look at her retirement plan to reallocate what she is investing in. I decided to make a long post out of it in a detailed case study. Here are some facts:

My sister is 32 and for the sake of the post we will assume she will retire in 23 years at the age of 55. She currently has $25,060 saved up for retirement in a Roth IRA and a employer sponsored plan (similar to a 401k). My sister does not contribute to social security as her work opted out of the program. She does however have what I call a "dinosaur pension" that will pay her a fixed sum for life after 30 years of service. I think she will have 30 years of service at age 50. She will also receive health benefits for life after 30 years of service. Her current monthly contribution including employer match is $263. At retirement(age 55) she will have the following amount depending on rate of return:

5% - $215,599
6% - $256,306
7% - $305,976
8% - $366,695
9% - $441,043
10%- $532,220

I think 10% is a good goal to shoot for especially since she is only 32. Her Roth IRA only has a couple thousand dollars in it that is already invested in stocks, so I will focus on her 401k-like plan. The biggest part of her plan that I had a problem with was that 35% of her money was going to a stable income fund. This currently pays in the range of 4.5% to 5.0%. There is nothing wrong with this, but this is by far her single largest holding as this has been happening for years. So I'm going to suggest reducing her ongoing contributions to this fund to zero and reallocating it to other funds. For this reason her potential return is going to lag until future contributions get allocated better. So I suggest reallocating her 35% to the following funds:

10% - International Equity Fund - Capital Guardian - This will bring her international exposure to 20% spread over two funds.

10% - Small Cap Equity Fund - Brandywine - This will bring her small cap exposure to 25%. This fund has low expenses (0.51%) and has returned 14.38% since inception. Inception included the market meltdown in late 1999 and early 2000 so I feel that this is pretty decent.

5% - Medium Size Company Fund - DIA - This will bring her Mid-Cap exposure to 20%.

10% - Balanced Fund - Dodge and Cox - This will be a new fund for her, so her contribution will be at 10%.

After this her ongoing contributions will look like:

20% - International
25% - Small Cap
20% - Mid Cap
10% - Balanced Fund
25% - S&P 500 Fund

Yes, this is really stock heavy, but I'm only changing ongoing contributions. She has about 35% of her portfolio already in a the Stable Income Fund mentioned above, so I intentionally set this to be stock heavy for at least the next 3-5 years at which point we can reallocate.

What else can she do? She can start contributing more. At a 10% return over 23 years, every additional $100 a month equals an extra $107,000 in retirement.

In any event, when this money is combined with her "dinosaur pension" I think she will be in okay shape. As always, I think the more anyone can contribute to retirement, the better.