Properties for a Comfy Retirement

By LUCILLE RENWICK

Sept. 16, 1997 12 AM PT

TIMES STAFF WRITER

In 1990, Donna Risvold and her husband divorced and made a deal: He got all of his pension and the car; she got the real estate and the minivan.

But this decade hasn’t been kind to real estate--and especially not to her properties, all in Riverside County--and Risvold, now 68, feels she is in financial straits.

“I’m what you call the ‘new poor,’ ” said Risvold, who lives in a two-bedroom home in San Jacinto she bought after the divorce. “I’m cash-poor, and I can’t sell my possessions to really get anything that will support me for the next 20 years,” she said in explaining why she sought professional advice. To help ease her concerns, she took a part-time teaching job.

Like many people of her generation, Risvold believed buying property would always be a sound investment. In fact, she made a career of real estate, working as an agent for 20 years. And in the 1970s, when she bought two small rental houses in Hemet and inherited a four-unit apartment building in Banning, values were rising and she thought she’d be set for life.

But the downturn in Riverside County’s real estate market was particularly brutal, with values plunging as much as 50% through 1996 in some areas.

The equity in Risvold’s three rental properties, once much higher, now totals about $139,000. (That’s in addition to the $10,000 equity in her San Jacinto home.)

Although Risvold’s portfolio is dominated by real estate, she does have other investments: an individual retirement account worth $13,500 invested in a certificate of deposit; a $4,000 bank CD; and stock worth a total of about $10,600 in a mining company and a food-supplement company.

Though counting so heavily on real estate investments for retirement was a mistake, Risvold is not in a hopeless situation, said Elaine Bedel, a fee-only certified financial planner based in Indianapolis who reviewed Risvold’s situation. In fact, Bedel thinks Risvold has enough assets to approach her income goal of $20,000 annually if she just rearranges them.

“Putting all your eggs in one basket can be a problem,” Bedel said. “Markets change--whether it be the real estate market or bonds or the stock market, which is why we preach diversification to be safe.”

In addition to the risks inherent in any investment, real estate requires management and is not liquid, which can be especially problematic when values fall. Unlike with a stock or bond, a piece of real property can be on the market for years before it will sell, even when the asking price is reasonable. In addition, transaction costs for real estate are high--sales usually mean fairly steep commissions, and mortgages carry significant service and other charges.

Bedel suggested that Risvold sell her rental properties now in order to get “off this merry-go-round of dealing with this real estate at your age.”

Even if the proceeds are less than the estimated $139,000 in equity in the three properties, Risvold would still come out ahead in the long run, Bedel said, because she would avoid continuing repair bills and other management costs.

Risvold could reach her income goal with a portfolio of bond and bond fund investments that, Bedel told her, will not only be easier to manage but also carry less risk.

Bedel made specific suggestions for a portfolio that could be expected to have an average annual yield of between 6% and 7% and would produce income of about $1,100 a month. That and Risvold’s $500 monthly Social Security payments should bring her close to her goal of $20,000 a year.

Although higher potential returns are possible in the stock market, there could also be long periods of low or negative returns.

“I would be very reluctant to put your money in the stock market because this is your nest egg, it’s assets that we’ve got to protect,” Bedel told Risvold, and she recommended that Risvold sell her individual stocks.

“The goal is to . . . give you some solid ground financially that will carry you on for the next 20 years,” the planner said.

Although Bedel’s advice sounded appealing, Risvold was hesitant about selling all her rental properties. She does want to sell the Banning property--it’s the most time and trouble--but is thinking she would like to hold on to the two houses until the market rebounds.

Southern California’s real estate market is already picking up, said John Karevoll of DataQuick Information Services, a San Diego-based real estate information service. In Riverside County, Karevoll said, home values are expected to rise 4% to 4.5% by the end of the year.

“If she suffered through the market’s downfall all those years, she might as well benefit from some of the momentum that’s coming with the increase,” Karevoll said.

Of course, that’s a general prediction about a broad area, not a statement of fact about specific properties.

And the fact is that Risvold’s problems with her real estate have involved more than just the fall in value. The cash flow has not been consistently good, and she’s racked up $4,500 in credit card debt incurred to pay for major repairs to the various properties. Plus she’s been playing “credit card roulette”--switching from one card to the next in an effort to get the lowest interest rate.

Bedel pointed out that holding on to the property longer would still leave Risvold with the same management and repair problems, limit her cash flow and reduce the time she’ll have to earn returns on money that could be better invested.

“I think you really need to reevaluate . . . whether you want to maintain this headache,” Bedel told Risvold.

Whatever Risvold ultimately decides about the real estate, she needs to stabilize her income situation.

She estimates she earns about $500 a month on the rentals after mortgage payments, bills and taxes are paid. When she faced unusual expenses, she would withdraw $500 from her IRA every few months.

She stopped doing that in May, when she began working part time in a literacy program with developmentally disabled adults, earning about $100 a week. She also makes a little extra money managing nearby properties for other people. That plus Social Security payments of about $500 give Risvold nearly $1,500 a month, which she says is just enough to get by.

She buys her clothes at thrift stores and clips coupons. Her only extravagance is the $150 she spends every couple of months on clothes for her 4-year-old granddaughter.

It would seem at first glance that her divorce settlement might have left her in pretty good shape--in addition to the properties and 1988 Plymouth Voyager minivan, she got her IRA and the stocks. She also has a life insurance policy on her ex-husband, for which she pays $83 per month.

But the settlement also required Risvold to pay off her husband’s $10,000 credit card bill, give him their paid-off Honda Accord and decline getting a portion of his Teamsters’ union pension.

As it has turned out, the pension loss has really hurt. “My lawyer said not to ask for any of the pension money because then I would still have to deal with my husband and he figured I was coming out all right with the buildings,” Risvold said.

But Bedel said that with the proper investments, Risvold can do OK without it. Still, regardless of when she sells any or all of her properties, Risvold will probably have to tighten her purse strings even more. For instance, she may want to cut down on how much she spends on her granddaughter.

As for reallocating Risvold’s assets, Bedel also recommended that she invest her IRA money elsewhere and that once the CD matures, she put it into bond investments.

If she follows Bedel’s advice, Risvold would have about $163,000 to invest. The planner suggested that she put $100,000 in U.S. Treasury bills, spreading them out in three-, four-, five- and seven-year bills in what is called a “laddered portfolio.” This will cushion the effect of changing interest rates because only some money will be reinvested each year. The $13,500 in her IRA, plus $53,000 more, should be evenly split between two mutual funds: the high-yield Northeast Investors Trust (five-year average annual return: 14.8%) and Loomis Sayles Bond (five-year average annual return: 13.3%), two Indianapolis-based funds that yield about 6% interest and are very stable, the planner said.

The remaining $10,000 should go into a highly rated corporate bond fund such as Strong Corporate (five-year average annual return: 10.1%).

As for Risvold’s credit card debt, she should pay that off with any extra money she has left over at the end of the month, Bedel said.

“I like all of these suggestions,” Risvold said. “There are many people like me who are struggling, and we’re not at an age where we can start over, so any steady flow of money we can get is helpful.”

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investor: Rhoni Smith

Age: 28

Occupation: Data specialist

Gross annual income: $31,800

Financial goals: Save for down payment on a house; for college education for son, now 3; and for retirement.

Current Portfolio

$925 in 403(b) retirement account, $2,548 in pension account

Recommendations:

* Pay off revolving debt.

* Increase payments on student loans to $100 per month.