Introducing Al and Alice Average
Al and Alice are mid-level white collar professionals who are rising through the ranks of their respective companies in typical age/experience appropriate ways. They are not wealthy, but they are able to maintain a satisfying standard of living and can afford to put more away from the future than they were able to do in their early post-collegiate lives. And they need to save for the future; they have two children, a son Normal, age 14 and a daughter, Typical, age 10.
They have some tolerance for loss (they don’t need the money immediately, meaning they have some latitude to be patient during times when the market slides into and then recovers from periodic slumps) but they can’t go overboard. Normal will be taking PSAT prep courses before they know it, and by the time he’s off to college, Typical is going to insist that she get new College Board study guides and not have to use the marked up ones left behind by her brother.
And as good as things are at work for Al and Alice, they’ve seen stories about people in their late 40s and 50s running into premature career- and earnings-problems. They make checklists of the pros and cons of reaching for return versus protecting principal and, it seems, wind up with about the same number of considerations under reach column. They lean toward a risk profile that mirrors their situation and, as it turns out, their name: 3 – Average.
For them, the taxable versus tax deferred decision is especially challenging. When in doubt, they should choose maximum flexibility in terms of getting one’s hands on one’s money (taxable account) – liquidity counts! But if they can afford to tie up their portfolio (or at least a portion of it) or pay penalties for unexpected early withdrawals they should try to go tax exempt (and avoid the annual tax drain) – to the extent they can (given their expected cash needs).
Al and Alice visit their financial planner and tell him they see themselves as Risk-3. He doesn’t jump up and down screaming, but says he would like to talk a bit with them before saying whether or not he agrees. To find out what he wants to discuss with them, click here.