Making Their Luck Turn
The early 1990s were not good to the finances of many Southern Californians, as Ed and Jean Salkeld know only too well.
The value of the Salkelds’ Claremont home plunged from well more than $200,000 to about $175,000. Unfortunately, Ed was downsized from one warehouse manager job only to encounter the same fate at the same job for another company two years later.
Fortunately, the couple survived on Jean’s salary as a senior transit analyst with the Pomona Valley Transportation Authority, and Ed recently got a job as an assistant manager at a pool supply warehouse.
But Jean, 57, and Ed, 52, now find themselves trying to make up for lost time. They had intended to devote the last eight years to saving for retirement, but Ed’s job struggles made that impossible.
“You think you’re all set and everything is going along well, but then you get a big surprise and that changes your plans,” Jean said.
The couple, who together earn about $96,000 annually, sought professional advice on how to arrange their finances so that they can retire comfortably in the next eight to 10 years.
“They can achieve their goals, but they need to take control of their money and make it start working for them,” said Suze Orman, a fee-only certified financial planner in Emeryville, Calif., and the author of two best-selling books on personal finance.
A big plus for the Salkelds is that they didn’t have to dip into their savings. In addition, Jean’s job will provide her with a substantial pension.
Their portfolio of assets--which they acknowledge is unfocused--includes undeveloped land zoned for residential use in Florida, stock in two companies, individual retirement accounts invested mainly in money market accounts, life insurance policies and savings accounts. Those assets are worth about $170,000, and they have about $56,000 equity in their home.
“To be honest, I can’t really say why we made some of these investments,” Jean said.
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Both describe themselves as cautious investors who pay little attention to the financial markets.
Before she would tackle the couple’s finances, though, Orman urged them to take care of some crucial paperwork: Each should establish a revocable living trust, a will and a durable power of attorney for health-care decisions.
The trust will, among other things, allow their estate to avoid probate, and the durable power of attorney would make it clear how each would want medical decisions to be made should he or she become unable to make them.
“I believe that being responsible to those that you love is a crucial part of financial planning,” Orman told the couple.
When all that’s taken care of--and they may want an attorney’s help--the Salkelds can move on to a less morbid task: straightening out their investments.
The couple’s single largest holding is a vacant lot near Tampa, Fla., they bought for $16,000 in 1979, when they were living in that area. The wooded property was intended as the site of the Salkelds’ dream home. But that was before Ed was transferred to California. The couple say they now have no plans for the property, valued at $50,000 to $60,000.
Orman recommends selling it now.
Bob Johnson, executive director of the National Assn. of Real Estate Appraisers in Scottsdale, Ariz., agrees that a vacant lot is not a wise investment.
“If you’re lucky, it might appreciate 4% a year,” he says. “I’d think you could throw a dart at a page of mutual funds and come up with one that pays better than that.”
He also notes that in addition to the yearly property taxes ($900 in this case), vacant land can be a financial drain for other reasons. Such lots are a magnet for castoff furniture, discarded motor oil and other trash, and sometimes for squatters. The lots can become overgrown with vegetation. Cities expect land holders to promptly address such problems, and if the lot is in a fire-prone area, the city may charge the owner to clear brush. And lot owners can be found liable if someone is injured on their property.
Orman said that selling the land should bring the Salkelds about $39,000 after commissions and taxes.
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Orman suggested that the next priority for the Salkelds be to revamp their insurance coverage. She believes they can get the life and health coverage they need without tying up so much of their money in low-return insurance investments. (For more on whole life insurance, see story, Page D9.) Ed owns a fully paid policy that offers a cash-surrender value of $6,400 now but would pay $20,000 at his death. A second policy covering him requires a $1,500 annual payment and provides a death benefit of $72,000. That policy provides a cash-surrender value of about $16,000.
Orman recommended cashing out of those policies now. Ed is relatively young, and he’s healthy (though that should be confirmed with a physical), so he can reasonably expect, without taking too much risk, to earn much better returns on that money.
During their working years, they should spend about $900 annually to purchase $500,000 worth of 10-year level-term policies, Orman suggested. This insurance, unlike Ed’s current policies, has no cash value at the end of the term, but it will provide a more substantial death benefit.
“With that money, the surviving spouse would be able to almost generate the income that each of you is earning now,” she explained.
Orman recommended spending about $2,000 a year on long-term-care insurance, which would cover the cost of nursing home care.
“Without this coverage, a long-term illness can be financially devastating to a family,” Orman warned. “Most people would not dream about going without homeowner’s insurance or car insurance, but they don’t even think of long-term-care insurance even though they’re more likely to need it at some point.”
In fact, Jean’s father was in a nursing home for a long time before he died, and she recalled how financially draining that period was for her mother.
“I think we will look into that insurance,” she said.
The Salkelds want to continue holding their individual stocks--$10,000 worth of shares in PepsiCo Inc. and $10,300 in Comshare Inc., a Michigan maker of business software whose stock has been volatile and that has lost more than half its value in the last year. The stocks were acquired more than a decade ago, when Ed worked at PepsiCo and Jean worked at a firm that used Comshare as a vendor.
Orman did not object, but she urged the couple to thoroughly research both companies using annual reports, analyst reports and newspaper articles before making a final decision.
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When it came to the couple’s savings, though, Orman did object to their holdings--and how.
Ed and Jean have about $29,500 in passbook savings accounts and $60,000 in IRAs largely invested in money market accounts.
The savings accounts yield about 2% annually, and the IRAs yield around 5%. Both should be transferred or rolled over into investments with better prospects, she advised them. Even if security remains a major concern, ultra-safe U.S. Treasury notes and bonds pay well more than 5% today.
Now the question is where exactly the couple should invest those funds, along with the money from the vacant lot and the cash from the life insurance proceeds.
About $1,000 will be needed to pay a lawyer to set up the trust and power of attorney, and the long-term insurance policy for this year will require $2,000.
Orman suggested that the Salkelds consider retiring a $16,200 second mortgage on their home that has an adjustable interest rate now slightly more than 9%.
Some financial advisors would frown on that advice, noting that the interest on that loan is tax-deductible.
In the Salkelds’ case, the actual interest rate amounts to 7% when tax breaks are factored in. But paying off debt is a guaranteed return, and 7% guaranteed is an excellent rate these days.
Orman also points out that “these are people who like to feel secure, so removing that debt would remove some stress and improve the quality of their life and retirement,” she said. “For some people, there’s a value on not having to worry about a debt.”
Of what remains, Orman suggests setting aside $25,000 for an emergency reserve, perhaps in a Charles Schwab Value Advantage Fund, a money market fund with a $25,000 minimum that currently yields about 5.47%.
The formula for investing their future savings as well as for the remaining $46,700 in investments and $60,000 in IRAs is the same: Invest in a diversified mix of mutual funds, with most of the money in U.S. equity funds and smaller amounts in international funds. Specifically, Orman suggested that the Salkelds put 75% into Vanguard Index Trust--Total Stock Market Portfolio, 10% in Vanguard International Growth, 10% in T. Rowe Price European and 5% in Montgomery Emerging Markets.
The Vanguard Index Trust-- Total Stock Market Portfolio (five-year annual average return: 19.14%) seeks to match the performance of index of the Wilshire 4,500, which consists of most publicly traded stocks.
Orman calls the no-load fund an appropriate investment for the Salkelds because they want exposure to the U.S. equity market but wouldn’t feel comfortable trying to pick particular sectors.
Vanguard International Growth (five-year annual average return: 14.59%) holds shares of established foreign companies; T. Rowe Price European (five-year average annual return: 14.88%) owns the shares of European companies such as Royal Dutch Petroleum; and Montgomery Emerging Markets (five-year average annual return: 11.86%) owns equities in companies in developing countries such as China and Mexico.
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However, Orman does not suggest all the money be invested at once.
Because stock markets have gyrated wildly recently, Orman urged the Salkelds to initially park all the money they’ll be investing in mutual funds in the Schwab Value Advantage Fund. They should then invest monthly by dividing the total sum into 12 equal portions, until they are fully invested after a year. This way, the couple will reduce the risk of investing all their money during a market high.
And, of course, the diversification in this mix should also protect them. Lately, U.S. funds have been outperforming their foreign counterparts, but that won’t always be true.
In any event, Orman describes each of the foreign funds as solid long-term performers with strong management, relatively low fees and no loads.
Although the Salkelds predict that they can tuck away $15,000 or more a year for retirement purposes, Orman believes a more realistic figure is $10,000, considering the $2,000 a year they would be spending on long-term care insurance plus incidentals such as gifts and trips.
So, assuming the Salkelds take Orman’s advice, how much could they have in eight years, when Jean is 65 and Ed is 60?
An exact prediction is impossible, of course, but Orman said it’s reasonable to plan on the basis of an overall portfolio growth rate of 8% a year, and thus a total of $387,707 by then. If they invest that total in fairly safe government bonds paying, say, 6%, they would have an income from investments of about $1,900 a month. With Jean’s $1,500-a-month pension, $740 in Social Security and Ed’s wages of $4,000 a month, they would have about $8,140 when Jean retires--an amount they consider more than adequate. Of course, interest rates may be much higher or lower in eight years.
Even when Ed retires a few years later and his wages are replaced by about $1,000 in Social Security, their total income would still exceed $5,000 monthly, which they say would make for a comfortable retirement.
“I’d say these guys are in fine shape if they take control and do the right things,” Orman said.
Ed admits to being surprised by the generally upbeat forecast.
“This plan provides a good place for us to get started,” he said. “I’m pleased with this.”
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Graham Witherall is a regular contributor to The Times. To participate in Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
Investors: Ed Salkeld, 52, and Jean Salkeld, 57
Gross annual income: About $96,000
Financial goal: Be in a position to retire comfortably in eight to 10 years.
Current Portfolio:
Real estate: About $55,000 in equity in home; vacant lot in Florida worth $50,000 to $60,000.
Individual retirement accounts: About $60,000, mostly invested in money market accounts.
Life insurance: Combined cash surrender value of $22,400 in two policies.
Cash: $29,500 in bank accounts.
Stocks: $20,300 in PepsiCo and Comshare.
Recommendations:
* Cash in the life insurance policies and buy 10-year level-term life insurance and long-term-care insurance.
* Sell the Florida land and take cash out of the bank account.
* Use $25,000 of cash to set up an emergency reserve in a money market mutual fund.
* Remaining money plus future savings of at least $10,000 a year would be invested in a diversified mix of no-load mutual funds.
Recommended Mutual Fund Purchases:
Charles Schwab Value Advantage: (800) 435-4000
Vanguard Index Trust--Total Stock Market Portfolio: (800) 662-7447
Vanguard International Growth: (800) 662-7447
T. Rowe Price European Fund: (800) 638-5660
Montgomery Emerging Markets Fund: (800) 572-3863
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Meet the Planner
Suze Orman is a fee-only certified financial planner and registered investment advisor in Emeryville. She has more than 18 years of experience in the field and is the author of the books “The 9 Steps to Financial Freedom” and “You’ve Earned It, Don’t Lose It.”
