Taking a hit on cusp of retirement

At 64, Gary Bowne’s retirement is so close he can almost touch it.

The former Peace Corps volunteer dreams of returning to teach in the tiny African country of Lesotho for a few years. The old hut, made of dung and adobe, where he lived in his 20s is empty and waiting for him.

But last year he made a serious misstep. He walked into his local Wells Fargo branch and asked for a safe investment for some of his savings.

Unknown to him, the fund the bank sold him was filled with sub-prime loans. Even worse, it contained a clause that might prevent him from selling all of his shares at once to halt his mounting losses.

Less than a year after he invested $100,000 in the fund, the balance stands at $84,000. The fund is charging him 3.01% -- roughly $3,000 a year at the start -- in expenses.

“I was naive,” Bowne said. “So much for trusting your bank.”

Financial planner Sandra Field of Asset Planning Inc. in Los Alamitos, who sat down to help Bowne, said there’s a slight chance that he could lose the entire investment. “He thought he was being extremely safe and conservative,” she said.

Bowne is like many other on-the-cusp retirees who, as they watch the market fluctuate, can easily suffer significant losses while trying to protect assets. Some are postponing retirement.

“People are overwhelmed,” Field said. “It’s dicey out there.”

Bank spokeswoman Mary Trigg would not comment on individual customers but said the bank’s offerings are broad “so that our financial consultants can tailor their solutions directly to their clients’ individual risk tolerance and investment goals.”

Fortunately for Bowne, even losing all $100,000 probably wouldn’t derail his retirement, but it could curtail future spending.

Without that money, he has $861,000 in retirement and investment accounts and equity in his home. Field said that amount, along with savings from strong retirement income, should keep his plans on track.

Bowne has been living conservatively to prepare for his retirement. For the last seven years, he has been contributing the maximum -- $15,500 a year -- to his company-offered 401(k) account. He also saves an additional $10,000 a year to non-retirement savings.

A trim lifelong bachelor with a tidy white beard, he made $80,000 last year selling computer supplies and equipment for Torrance-based MacMall.

Three days a week he runs the four-mile perimeter of Mile Square Park in Fountain Valley to stay ahead of the genes that felled his father with a heart attack at 53. One brother survived a heart attack, the other a stroke.

He shows as much prudence with his spending habits as he does with his health.

Bowne spends just $2,500 a month on all his expenses, including clothes, food, utilities and his home loan. The three-bedroom town home he bought for $95,000 in 1986 carries a $48,000 mortgage and could be worth $300,000. Without a television, he has no cable bill. He uses his cellphone infrequently.

Getting by with less was part of his education in Lesotho, where he lived without electricity, running water or paved roads. Forty years later, he still keeps up with his former students and speaks their native “clicking” language of Sesotho. The clean air, expansive scenery and chance to teach English there again are luring him back.

With retirement in sight last year, Bowne started to examine his savings. He went to the bank thinking he might buy a certificate of deposit, an insured account with a very low interest rate.

When he asked about other safe options with more growth potential, a financial advisor proposed a fund that he said would generate about 7%. Bowne bought it even though he knew it was not government-insured.

The account was a floating-rate fund, a type of bond fund that, Field said, many people were buying last year as a stable investment. The fund bought debt, sub-prime loans and other assets, reinvesting proceeds as the debts pay off.

“It looked like a good idea at the time,” Field said.

Coincidentally, she also bought shares for some clients in similar funds. As the shares lost value, she tried to find out what was going on but wasn’t getting clear answers from fund managers.

“We sold out because the price was dropping, not because we understood there was sub-prime garbage in there,” Field said.

Bowne said he had no idea he had invested in the sub-prime market. Nor did he know the fund contained a restrictive exit clause.

The fund prospectus lets investors take as much as 25% out during one week in each quarter, but fund managers -- until this year -- had been giving back all of it to those who wanted out. In the first three months of this year, however, it only gave back 85% to those leaving the fund.

To make matters worse, Bowne did not realize that he was reinvesting the monthly $551 dividend back into the same money-losing fund. Field told him to halt the reinvestment right away.

After recent calls and visits to Wells Fargo, Bowne said a bank manager returned a call last week to say he had submitted Bowne’s request to sell his shares. Bowne is hopeful but still worried it might not happen.

Even without the bank investment, Field said, Bowne’s current $861,000 net worth should appreciate to $2.4 million by the time he is 85, assuming an overall return of 7% a year. Without the loss he would have had $2.6 million.

This is largely because Bowne can expect strong retirement income from multiple sources.

If Bowne retires in two years, he should be getting about $56,000 a year in retirement pay, Field said -- about $24,000 a year from Social Security, more than $19,000 a year in retirement pay as a former public schoolteacher for 15 years and about $13,000 a year from other investments.

When he turns 71, mandatory distributions from retirement accounts kick in, and his income should jump to more than $85,000, Field said.

Bowne’s high retirement income means he could reinvest monthly in his retirement accounts for decades, starting with $12,000 in two years.

To improve returns, Field recommends that he rebalance his portfolio. Right now, more than 70% of Bowne’s money is in cash and fixed-income investments, including bonds. He keeps about $115,000 in his checking account.

The planner recommended that he keep 11% of his portfolio in cash and invest 40% in bonds and other fixed-income investments. He should put 12% to 15% into mutual funds that contain international holdings.

About 30% should be invested in U.S. stocks, mostly in shares of large companies, Field said. The remainder should be in stocks of small- to mid-size companies.

Moving to Lesotho would help financially. Bowne believes his monthly expenses wouldn’t exceed $500.

It also helps that one of Bowne’s former students is an airline executive who provides him with free air travel, saving him as much as $4,000 a trip. This could add up, especially if Bowne comes home periodically.

Field said Bowne must take care to monitor his investments regularly while abroad.

“A nightmare scenario would be that he goes to the bush land, puts everything on autopilot here and, then, either doesn’t get news about his investments or, he has the news, but he can’t react and it’s too late,” she said.

Bowne said he would use Internet cafes in a nearby village to monitor his investments and would have his sister, with power of attorney, act on his behalf.

As long as Bowne can avoid another bad investment, there is one advantage to his current misfortune, Field said. He’ll have tax return losses to write off for several years.

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(BEGIN TEXT OF INFOBOX)

This month’s makeover

Who: Gary Bowne

Income: $80,000

Goals: Bowne wants to retire by 2010. Review and rebalance investment portfolio accordingly. Analyze potential plans to move back to Lesotho for a few years after retiring.

Assets: Estimated $861,000 in retirement and investment accounts and about $250,000 in equity in his Santa Ana town home. Retirement income expected to start at $56,000 in two years, increasing to $85,000 in 2014.

Debts: $100,000 investment last year in a bond fund is losing value and charging 3% in annual expense fees; balance stands at $84,000. Home mortgage is $48,000. No credit card debt.

Recommendations: Get out of the bond fund quickly to salvage as much of the value as possible. Immediately stop reinvesting $551 a month in dividends into the fund and redirect it to income. Reduce checking account balance that exceeds the federally insured maximum balance of $100,000. Change investment portfolio mix. Keep living expenses low and reinvest to retirement funds throughout retirement years, beginning with $12,000 annually in 2010. Determine reliable means of monitoring retirement investments from abroad.

About the planner: Sandra Field is a fee-only financial planner with Asset Planning Inc. in Los Alamitos.