Early Birds
It has been almost a decade since Bill Hawk, a former vice president with Security Pacific Corp., found himself the victim of corporate downsizing, but he and his wife, Mary, still feel the repercussions.
Bill, an easygoing 65-year-old, says he was depressed for more than a year after losing his position with the company that employed him for 32 years.
“I had always planned to work until I was 65,” he says. “I thought I would have what I always had, a stimulating job.”
Bill finally obtained another position with an Orange County firm. And though the job did not entail a substantial cut in salary, it did mean a long and arduous commute, since he and Mary couldn’t bring themselves to leave the San Gabriel Valley, where they’d lived since they were newlyweds.
Frustrated, Bill retired at 62 with hopes of obtaining a part-time job. It never materialized. What did was an unexpected new volunteer career as head of the docents program for the downtown Los Angeles Central Library.
Still, while the volunteer job is emotionally rewarding, the loss of a paycheck has cost the Hawks a significant amount, says L. Edward O’Hara, Jr., a fee-only certified financial planner in Maryland.
The couple’s overall financial picture is far from gloomy, O’Hara adds. But their financial lives have been forever affected by Bill’s premature retirement. For one thing, if Bill had retired at 65 instead of 62, his Social Security benefits would be higher. His pension, which is based on years of service and salary, would be higher too. Moreover, the couple would probably enjoy a higher net worth today, since a steady income would have given them more money to invest, O’Hara says.
The couple’s money concerns also involve Mary’s trepidation about handling finances if Bill dies before she does.
“I’ve never balanced a checkbook,” she says.
Mary, 61, says her worries are compounded by the fact that Bill has been the primary breadwinner during the couple’s 40-year marriage. Initially Mary stayed home with their three children, later taking a modest-paying part-time job teaching parent education at Pasadena City College. Not only did she earn just a few thousand dollars a year, but she was ineligible for the institution’s 403(b) retirement savings plan until a few years ago.
“I teach because it’s my joy and love. It’s certainly not a big moneymaker,” Mary says with a laugh.
Despite all this, the Hawks enjoy a certain amount of financial security.
Their gross annual income of $44,000 includes Bill’s $27,000 annual pension, his $11,785 in Social Security income, Mary’s $4,400 salary and approximately $900 in earnings from investments.
The couple’s estimated net worth is slightly more than $450,000 and includes $119,800 in zero-coupon bonds, owned in individual retirement accounts; $20,600 in a tax-deferred variable annuity; $32,000 in BankAmerica Corp. shares; $2,800 almost evenly divided between the AARP Growth & Income mutual fund (five-year average annual return: 16.9%) and AARP
Capital Growth fund (12.8%); $3,200 in savings accounts and short-term investments; $2,200 in Mary’s 403(b); and an estimated $275,000 equity in their Arcadia home of almost 30 years.
With that income and nest egg they aim to continue taking their annual two-week vacation in Hawaii and maintain their beloved backyard swimming pool. What’s more, they hope to indulge their mutual love for travel. “We want to drive across the country--or maybe just fly,” Bill laughs.
In reviewing the pair’s finances, O’Hara determined that their major problem was their failure to adequately factor in the pressures of inflation.
While Social Security payments should increase in tandem with consumer prices, Bill’s pension carries no such automatic adjustments. Since the couple’s expenses equal their income, they could be facing trouble unless they make some changes, O’Hara says.
Compounding the problem is the couple’s asset mix. They have 70% of their financial investments in zero-coupon bonds, which offer a guaranteed rate of return but don’t have stocks’ growth prospects. The couple should gradually lower the bond portion to 50%, O’Hara says.
They should not simply sell off assets wholesale to do this, he advises, but rather, as their zero-coupon bonds (currently garnering 11.25% in annual interest) begin to come due in 1998, they should invest the proceeds in stock mutual funds.
O’Hara recommends a similar strategy for the couple’s variable annuity with Putnam Investment Management, worth $20,600 and set to mature in 2003. If the investment vehicle permits withdrawals up to a preset limit without incurring penalties, the Hawks should utilize that option, O’Hara says. Otherwise, the couple should be patient and invest the entire sum in mutual funds when possible.
O’Hara isn’t a big fan of annuity investments; he says they rarely offer enough benefits to justify their relatively high annual fees and surrender charges.
Moreover, annuities are often confusing. The Hawks aren’t even sure of the payout rules on theirs. Annuities generally pay out only while their purchaser is alive.
As for stock mutual funds, O’Hara currently recommends T. Rowe Price Equity-Income (five-year average annual return: 17.1%) and Vanguard Index 500 (16.7%). He also recommends the Hawks transfer all their funds in AARP Capital Growth to AARP Growth & Income because the former fund, according to the Morningstar rating system, offers above-average risk for only an average return, while the latter has produced above-average returns at below-average risk.
O’Hara downplays Mary’s fiscal worries about widowhood. Even though she would collect only 50% of Bill’s pension should he die before her, the couple’s assets, including their home, combined with the proceeds of life insurance policies worth an estimated $70,000, make it extremely likely Mary will have enough money to see her through her remaining years, O’Hara says.
However, O’Hara urges Mary to file for her Social Security benefits when she turns 62 later this year and is eligible to collect three-eighths of Bill’s benefits. This money, invested properly, can generate additional income in the future. In addition, he suggests Mary roll her 403(b) funds into an IRA when she retires.
Finally, O’Hara recommends the couple begin investigating long-term-care insurance as well as policies designed to supplement Medicare benefits. Though he isn’t certain the couple needs such insurance--BankAmerica currently provides health-care coverage for Security Pacific retirees--he thinks it’s important that Bill and Mary be up to speed on their health-care options. If the couple does decide to purchase a long-term-care policy, O’Hara says, they need to make sure the policy indexes benefits for inflation and pays for hospitalization and nursing-home and long-term care.
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Helaine Olen is a Los Angeles-based freelance writer. She can be e-mailed at holen@aol.com Ideas and questions about money make-overs can also be left at (213) 237-7288.
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This Week’s Make-Over
* Investors: Bill and Mary Hawk
* Ages: 65 and 61
* Occupations: Bill is a retired bank auditor and head of the Los Angeles Central Library docent program; Mary is a part-time teacher.
* Gross annual income: $44,000
* Financial goals: Maintain current standard of living
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Current Portfolio
* Cash and short-term investment savings: $3,200 divided among three savings accounts
* Stocks and mutual funds:
$32,000 in BankAmerica Corp. stock
$2,800 evenly divided between AARP Growth & Income and AARP Capital Growth
$119,800 in individual retirement accounts, invested in zero-coupon bonds
$20,600 in Putnam variable annuity
$2,200 in a 403(b)
* About $275,000 in home equity
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Recommendations
* Reallocate assets gradually until 50% of funds are in mutual funds and 50% in fixed-income investments.
* If the annuity permits limited withdrawals without penalties, utilize the option and invest in mutual funds.
* Move funds in AARP Capital Growth to AARP Growth & Income.
* Investigate Medigap and long-term-care insurance policies.
* Roll 403(b) into an IRA when Mary retires.
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Recommended Purchases
* T. Rowe Price Equity-Income (800) 638-5660
* Vanguard Index 500 (800) 662-7447
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Meet the Planner
L. Edward O’Hara Jr. is a certified financial planner and principal owner of Capital Asset Management Services, a fee-only investment management, tax and financial advisory firm based in Silver Spring, Md. He is chairman of the Financial Planner training program and adjunct professor at Florida Institute of Technology’s Virginia-based graduate center. He serves as president of the National Assn. of Personal Financial Advisors, Northeast / Mid-Atlantic Region
