A LOOK AHEAD: Money makeover : Prudent Financial Plan Can Pay Dividends in Retirement : Investments: Advisers help lead Garden Grove woman down path to future security. Diversity, they say, is the trick.
Kathleen M. Morrison owns a condo in California that she can’t afford to furnish and a house in Wisconsin that she fears she can’t afford to sell.
The 48-year-old Garden Grove resident, a secretary for Veterans Affairs, says she has no plans to return to the Midwestern town where her sister and parents live. She is renting out the home she owns there and getting a tax break on it.
“I just want to know what the ramifications are of selling it,” said Morrison, who admits to being an amateur at money management. She began considering her own financial future only recently, she said, when her parents retired.
“I look at them living on Social Security, and they are barely making it,” she said. “My father is in his 70s and still doing part-time jobs because they need the money.”
Morrison would like to plan prudently for her own retirement, but she has little money to spare. Her condominium, which she bought less than a year ago, is only partly furnished.
“I have all the basics--microwave, table, chairs, television--but there are a few things I would like to do,” Morrison said, possibly with the proceeds from selling the Wisconsin house. “I would like to redo the kitchen because it is real dated. And I’d like to buy furniture for the living room. Right now I have a box for an end table.”
For advice on how to proceed, Morrison met with Laura Tarbox, a Costa Mesa certified financial planner. Mark Taylor, a San Clemente-based certified financial planner, also commented on her situation.
“As a general rule,” Tarbox said, “it is not a good idea to sell an investment to spend.” If Morrison were to sell the Wisconsin house, Tarbox said, the temptation to use all of the proceeds right away would be great, and an important source of investment income would fly out the window.
Tarbox pointed out how Morrison’s rental property is paying off for her.
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The house rents for $1,000 a month. After paying her mortgage and fees to a property management company, Morrison clears $180 a month that, over the course of a year, adds more than $2,000 to her annual salary of about $26,300.
Besides, the house gives Morrison a tax break that amounts to several thousand dollars a year, Tarbox said. “To get the same return, 10%, she would have to find another high-return investment.”
Taylor, however, pointed out that owning real estate can be tricky. Property managers don’t always have the landlord’s best interests in mind, he said, and tenants are not always careful with the property.
Especially in Morrison’s case, Taylor said, keeping a watchful eye on her rental house is difficult because she lives in a different state.
But at least she is dealing with a familiar situation, he said. “She has something that has worked for her for years, so if she doesn’t mind the hassle, maybe she should keep it.”
Morrison said she will probably do just that. “I don’t have a good reason to sell it,” she said. And the tax breaks and rental income do increase her spending power.
Both Taylor and Tarbox agreed that Morrison should try to diversify her investments more as she plans for retirement.
In addition to her rental house and Garden Grove condo, Morrison has $15,000 in an individual retirement account and $13,600 in a 401(k) savings account that is invested mostly in government securities. She adds $300 a month to those funds.
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Morrison’s portfolio, Tarbox said, is typical for people new to investing. “It is very common that people are investing too conservatively for retirement,” she said, “because the investments are considered safe.”
As it turns out, Morrison’s home in Wisconsin is outperforming her other holdings by quite a lot. Her IRA and 401(k) accounts are earning her just over 4% a year. Tarbox advised that she consider boosting her returns by entering a new arena: the stock market. In the long run, Tarbox said, stockholders generally reap higher profits than do other types of investors.
If Morrison does add stocks to her portfolio, Tarbox said, she might consider no-load mutual funds and also an international fund.
Taylor recommended that Morrison put at least 50% of her capital in stocks. By doing so, he said, she may be able to boost her annual return to as much as 10%.
“I thought I was doing a pretty good job of investing,” Morrison said after listening to the experts. But, she added, “I can see where doing it conservatively does not always get you what you need.”
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Money Makeover: Kathleen M. Morrison
Age, occupation: 48, secretary with Veterans Affairs in Long Beach
Annual household income: $26,283 in wages, $12,000 in rental income. Total: $38,283
Assets: A condominium in Garden Grove valued at $120,000, a house in Wisconsin valued at $125,000, an individual retirement account valued at $15,000, a 401(k) account valued at $13,600, a 1992 Toyota Corolla valued at $8,100. Total: $281,700
Liabilities: $98,000 mortgage on the condo, $64,000 mortgage on the house in Wisconsin. Total: $162,000
Financial goals: Earn a higher return from assets, put together a sound plan for a comfortable retirement
The Experts
Laura Tarbox, 37, is the principal of Tarbox Equity, a Costa Mesa financial planning firm she established in 1985. Before founding Tarbox Equity, she worked with Gagen & Co., an investment advisory firm in Tustin.
Tarbox has served as a director on the National Board of the Institute of Certified Financial Planners and is a past president of the Orange County Society of the Institute of Certified Financial Planners. She teaches financial planning classes at UC Irvine.
Mark Taylor, 38, is a certified financial planner and director of his own firm, Mark A. Taylor CFP, in San Clemente. Before starting his own company in 1983, Taylor worked at Integrated Financial, a pension administration company in Irvine. He is president-elect of the Orange County Society of the Institute of Certified Financial Planners.
