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Direction matches discipline

Lauren Kelly (right), an event planner, plays soccer at Reservation Park in Boston. Lauren Kelly (right), an event planner, plays soccer at Reservation Park in Boston. (Adam Hunger for the boston globe)
Email|Print|Single Page| Text size + By Lynn Asinof
Globe Correspondent / July 29, 2007

For two years, Lauren Kelly dutifully put money into her company's retirement plan, figuring she was doing all the right things to build a nice nest egg. But when she changed jobs and rolled her 403(b) into an IRA, she discovered her money had not been invested. It was still in a money market account.

"I was pretty disappointed in myself," said the 25-year-old Brighton resident. "I just didn't understand."

She went online, perused the abundant investment options, and got thoroughly confused. So she applied for a Globe Money Makeover, saying that she needed help figuring out how to grow her retirement portfolio.

Kelly needn't have been so hard on herself, as she discovered when she sat with Susan H. Brown, a fee-only financial planner with the Back Bay Financial Group in Boston. Earning $37,000 a year as a medical education event planner, Kelly had shown impressive financial discipline.

"You're saving 7 percent of your after-tax income for retirement, plus another 8 percent toward a contingency fund," Brown told her. "This is in addition to paying $200 per month on student loans. Great job."

The next step was putting those savings to work. Because Kelly has only about $3,000 in retirement savings, Brown suggested using a "target-date" mutual fund for all her accounts: her rollover IRA, her workplace Simple IRA, and a new Roth IRA that Brown is recommending.

Target-date funds are a diversified portfolio of mutual funds that gradually become more conservative as your retirement date approaches. Brown recommended one such fund designed for retirement in 2050; the current investment mix is 90 percent equities and 10 percent fixed income.

"It's pretty aggressive, but that's fine because you are young," Brown said.

Kelly will eventually outgrow this single fund approach. "The problem with lifecycle funds is that the management fees are a little high," Brown said, noting that the 2050 fund charges 0.84 percent a year compared with just 0.10 percent at some index funds. By the time Kelly has $20,000 tucked away, she should be crafting a lower-cost portfolio herself, Brown said.

Ready to take the plunge, Kelly went online in the Back Bay Financial office to invest. Her rollover account at Fidelity Investments, which had grown to $2,914.59, was put into Freedom Fund 2050 without a hitch. "This is exciting," Kelly said, as the wall-mounted screen confirmed her purchase. "Just going through the process with someone is what I needed."

But Kelly was stymied when she tried to set up automatic investment for her workplace account and Roth IRA. With just $180 in her workplace Simple IRA, she didn't meet investment minimums, the computer said.

A phone call to Fidelity straightened out that problem, allowing Kelly to automatically buy shares with her monthly contribution. But she still needed $2,500 to purchase a mutual fund in her Roth without incurring monthly fees. Even if she choose automatic investment, she found, she would have to commit $200 a month, which is more than Brown wanted her to allocate to the Roth.

So Brown told Kelly to contribute $100 each month to her workplace plan to take full advantage of her employer's matching contribution of up to 3 percent of salary. Another $100 a month should go into the Roth, where funds can grow in a money market account until she meets the $2,500 minimum. She might accelerate the purchase by using any work bonuses for additional contributions.

The amounts might look small now, Brown told Kelly, but the dollars will grow quickly. Based on her current savings discipline and an estimated 7 percent annual return, Brown projected that Kelly could have nearly $30,000 in her portfolio within the years.

To be considered for a Money Makeover, fill out the application at the "Your Money" section of boston.com/business, or call 617-929-2916.

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