Retired couple have work cut out for them
Joel and Jessica Soffer feel fortunate.
The Long Beach residents were able to retire early and still live comfortably enough to provide help for their two adult children while taking annual vacations to such places as Shanghai and Edinburgh, Scotland.
When at home, Jessica, 59, volunteers for the American Cancer Society and Joel, 63, rakes leaves at the Japanese Garden at Cal State Long Beach.
But after the market downturn last fall, they know they can’t continue to live the way they have been living. They are cutting expenses, looking for ways to increase their income and hoping they won’t be forced to start punching the clock again.
“If we had to, we would go back to work,” Jessica said. “But the thought of being accountable every Tuesday, Wednesday and Thursday at 10 a.m. has become unappealing.”
Since last fall, Joel’s retirement portfolio has dropped from $550,000 to $380,000. That was the main source for funding their trips, in addition to their daily living expenses. If the portfolio appreciated 10% in a year, for instance, Joel would sell enough stock to give the couple an equivalent amount in cash.
“I can no longer rely on appreciation,” said Joel, a former branch manager at Bank of America.
The steep losses in the portfolio were mostly the result of his decision to keep 80% to 90% of his retirement savings in stocks and equities when the market started taking a downward spiral last fall, said Donald Hance, a financial planner and founder of Glenmore Financial in Pacific Palisades.
“At this stage in his financial life cycle, he shouldn’t have exposed himself to so much risk,” Hance said. Had Joel kept less than half of his savings in stocks, Hance said, he would have lost half as much as he did.
Joel has since parked his savings in a money market fund earning less than 1%. He spends time daily reading financial newsletters and websites and wondering when to reenter the market.
“That’s what [I] and others do,” he said. “We chase the yield. It worked for quite a while.”
Hance suggests that Joel stop looking to his investments for their “entertainment value” and develop an appetite for boring investments. Selected strategically, he said, these could provide the Soffers with a reliable income stream and keep them from having to go back to work. But they must reduce expenses for the next three years, he said, until Jessica’s Social Security income kicks in.
“Their portfolio is going to run out,” Hance said, “but hopefully we can extend it for as long a period as possible.”
With a net worth of $1.4 million, the Soffers have enough for the future. Most of it, however, is tied up in the estimated $900,000 value of their home, which they remodeled in 2001. Rather than sell the home and downsize, they wanted to stay there.
In addition to Joel’s individual retirement account, Jessica has $67,000 in retirement savings. The couple have an additional $41,900 in regular savings. Earnings from those accounts, as well as from Social Security, the Department of Veterans Affairs and other sources, give them a monthly income of $7,200.
They have a $6,000 balance on one credit card and owe $8,000 on a home equity line of credit.
Hance believes the market may be only halfway through its current down cycle. He pointed to four prolonged periods of flat-to-losing returns in stock market history, including 2000 to the present.
“The worst thing you want to do is to put all that money back into the market,” Hance said. “Maybe the market will go up, but what if it goes down?”
But Jessica’s Social Security income could save the day. She had been planning to wait seven years to take $21,400 in annual Social Security income. Instead, Hance suggested she start taking a lower benefit of $16,000 in 2012. The additional income could enable them to remain retired -- if they can economize, especially for the next three years while they are spending more than they are making.
Hance said the Soffers should slowly put 35% of their assets back into the stock market and 65% in cash, U.S. Treasury bonds and other fixed-income investments.
To guarantee they have enough income over the next decade, Hance suggested they use $170,500 to set up a 10-year “ladder” of investments in bank certificates of deposit and Treasury bonds, which offer modest but steady returns.
A ladder in financial terms is a series of investments, usually CDs and bonds, designed to mature in successive years to ensure a regular income.
Hance assumed that the Soffers would withdraw $30,000 this year from their savings. Then the bond ladder would begin to yield income at the end of this year for them to use in 2010 and continue to give them guaranteed income every November as the investments mature.
Hance designed the ladder so that the annual income drops in 2012 when Jessica starts getting Social Security payments.
How to allocate investments has become more debatable in the recession, and some planners would take a slightly different approach.
“I would not be as pessimistic. With a 10-year bond ladder, they will never get their money back,” said financial planner Sandra Field, founder of Asset Planning Inc. in Cypress.
She’s encouraged by the market’s 30% recovery over the last few months and thinks that the Soffers should invest in corporate bonds with yields of 7% to 9% and a Ginnie Mae fund with returns of 4% that is backed by the U.S. government. Ginnie Mae is a government-sponsored mortgage guarantor.
Field recommended that the couple also invest up to half of their savings in stocks that pay dividends of 4% to 6% and in Treasury Inflation-Protected Securities, which pay a fixed return, such as 2%, over inflation.
Financial planner Carl Camp, founder of Eclectic Associates in Fullerton, said he would use an approach similar to Hance’s. But he recommended the Soffers invest in corporate bonds for their higher yields instead of Treasuries. Camp said the Soffers should allocate 40% of their savings to stocks.
Hance said he was deliberately conservative. His clients who had CD-bond ladders before the downturn, he said, “are so happy they are skipping down the street.”
Some specific benefits of a ladder: CDs are insured by the Federal Deposit Insurance Corp., Treasuries are backed by the government, and both can be sold before they mature.
“Essentially you have the federal government ensuring your income,” Hance said.
Hance suggested the Soffers keep $88,000 in shorter two-to-five-year bonds or CDs to provide for greater liquidity. He would invest about $154,000 in stocks in exchange-traded funds, which he said cost less in management fees than do regular mutual funds.
When the stock market has a good year, Hance said, the Soffers could take some of their earnings and buy a new top rung for their ladder. This approach, he said, helps to ensure they buy low and sell high.
“Most people want to know, ‘What [return] can you get for me?’ ” Hance said. “I sort of turn that question around and ask, ‘What do you need?’ ”
Using an annual 8% to 9% appreciation for their stock investments -- about the average returns over the last 25 years -- and 4% overall for the CD-bond ladder, Hance calculates that the Soffers could remain in their home for at least 27 years, until Joel is 90 and Jessica is 86. But only if they continue to watch their spending.
That may be a challenge. The Soffers’ children, a daughter, 33, and a son, 37, are single parents who recently lost their jobs. Each has two children. In the last year the Soffers have paid $3,500 in legal bills to help their daughter and $12,000 to help their son.
Hance urged them to reduce their aid to their children as much as they can. The $192,000 available balance on their home equity line of credit should be tapped only as a last resort, he said.
The Soffers are making concessions to their financial situation. After spending thousands of dollars on vacations for a few years, they didn’t take any long trip last year and aren’t planning one this year.
In a worst-case scenario, the Soffers said, they would sell their home. But they feel motivated to do all they can to keep from selling their home or returning to work.
“In truth,” Joel said, “we are a lot better off than a lot of people.”
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(BEGIN TEXT OF INFOBOX)
This month’s makeover
* Who: Joel and Jessica Soffer
* Income: $86,400
* Goals: Reduce expenses and increase income to cope with 30% drop last year in Joel’s retirement savings portfolio. Stay retired and remain in their home. Decide when and how to put their retirement savings back into the stock market.
* Assets: $900,000 estimated value of home, $380,000 in Joel’s retirement savings, $67,000 in Jessica’s retirement savings, $41,900 in regular savings. Annual income includes $29,000 from Jessica’s pension with the Teamsters, $25,800 from Joel’s Social Security disability income, $1,440 from the Department of Veterans Affairs and proceeds from stock sales in Joel’s retirement portfolio.
* Debts: $6,000 in credit card debt, $8,000 borrowed against their home. The Soffers regularly help cover expenses for adult children who recently lost their jobs while raising their children as single parents.
* Recommendations: Jessica should begin taking $16,000 a year in Social Security payments in 2012 instead of waiting until 2016 to receive $21,400. Slowly reenter the stock market but reduce their exposure to stocks to 35% from as much as 90%. Put 65% in cash, U.S. Treasury bonds and other conservative fixed-income investments. Of that amount, put $170, 500 into a 10-year ladder of certificates of deposit and Treasury bonds that mature sequentially to provide a guaranteed income stream.
* About the planner: Donald Hance is a certified financial planner and founder of Glenmore Financial in Pacific Palisades.
