Feet Off the Ground?

John and Linda Buch were startled at the financial planner’s conclusion: Just save a bit more and the couple could retire early and still have a $15-million nest egg in their 80s.

“For you folks,” said Margie Mullen of Mullen Advisory of Los Angeles, retirement “will be the golden years. Most people aren’t in your situation.”

The Buchs knew they were doing OK when they sought advice from a planner, but they had no idea they could ever be that well off. Mullen’s analysis assumed the couple, who are airline pilots, would continue to earn a combined income of almost $300,000 for another decade or so, that they would earn returns of about 10% annually on the bulk of their substantial savings, and that they would want to avoid early-withdrawal penalties on their retirement accounts.

But after hearing the details of Mullen’s plan and thinking about it, John, 44, asked: “Why do we want to die with $15 million?”

The couple, who have decided not to have children, said they wouldn’t mind leaving money to relatives or charity but that dying with millions of dollars doesn’t have much appeal.

“My father always said, ‘Die with your last money spent,’ ” Linda, 34, said. “I like his attitude.”

So to help the Buchs clarify their thinking, The Times asked for another view, this one from Stephen Pollan, a financial and legal consultant and commentator in New York who is the co-author of the recently published book “Die Broke.”

Pollan challenges many common assumptions about retirement and inheritances. In short, he doesn’t recommend either.

“On your last day on this Earth, both of you should have given a final check to the undertaker, and, with any luck, it should bounce,” Pollan told the couple, using a favorite line.

No one should transfer wealth after death, Pollan argues. Rather, he advises his clients who want to give away money that they do so while they are around to see others put it to use and to enjoy the gratitude.

“You can’t hear thanks when you are dead and buried,” Pollan said.

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Retirement, he says, is an idea whose time has passed, something that for most people is neither necessary nor desirable.

“Look at your working life,” Pollan tells his readers, “as a lifelong journey up and down hills rather than as a single climb up a steep cliff that ends with a fatal step off the edge at the arbitrary age of 65.”

Specifically, Pollan cautions people against being too financially and emotionally dependent on an employer. A job may seem secure now, but that may not always be the case.

In fact, John and Linda, who fly passenger jets for United Airlines, are concerned about their ability to meet the physical demands of the job. If they fail one of the company’s twice-yearly physicals, they can be grounded indefinitely.

Because of the job-security risk, “it would be nice to have the opportunity to retire early,” John said.

That fear goes right to one of the main points in Pollan’s “Die Broke” argument: that workers today can’t count on any sense of corporate loyalty, and that they should thus think of themselves more as “free agents” always looking for ways to make themselves more marketable.

“Don’t rely on retiring from your job” on your own terms, he told the Buchs. “It won’t happen on your timetable, but their timetable. I want you guys to decide when to get out.”

Pollan advised John and Linda to begin thinking about ways they could transfer their skills into other careers, possibly teaching or setting up a business. He also suggested that the couple explore arrangements suggested in his book--including annuities, disability insurance and charitable remainder trusts--that would help assure or protect income in the future.

None of this is to say that the Buchs or anyone else worried about saving should forget about putting money aside, neglect to take full advantage of any pension or tax-favored savings plan, or ignore the need to set financial priorities. Rather, Pollan said, it’s that organizing one’s finances around a goal of building up a big nest egg isn’t the best way to go about it. If the Buchs want another way to make sure they have enough money throughout their lives, Pollan said, they should approach their finances with these thoughts in mind:

* Work: Individual jobs may come and go, work schedules may change, and pay may rise or fall, but John and Linda should think of themselves as people able to earn money in one way or another for decades to come.

* Insurance: Health is an unpredictable thing. The couple should make sure they have sufficient health and disability insurance, and possibly long-term care insurance, at all times.

* Annuities: An annuity is a contract between the purchaser and the seller that guarantees the purchaser an income for a set period or until death. The high expenses and inflexibility of some annuities have made a lot of people wary of the whole investment category, but Pollan likes them because they remove the worry of running out of money in later life.

Pollan says the annuity of choice for die-brokers is the single-premium immediate fixed annuity. An investor would actually buy several of these, beginning as late in life as possible. As the name implies, the buyer makes each annuity purchase in a single lump sum. The amount of income paid the purchaser is fixed for the life of the contract, and the payments start 30 days after the purchase.

Pollan favors these kinds of annuities because they are easier to understand, and it’s easier to compare various companies’ offerings than if they were to consider one that wraps in insurance or variable investment returns. Charities, banks, brokers and insurance companies all offer annuities.

* Charitable remainder trust: In later life--in one’s 70s, say--an investor could go to a lawyer and set up a charitable remainder trust or trusts. This would provide certain tax benefits, and the investor would continue to receive income from it until death. What’s left at that time can go to whatever charity the investor--or a board made up of the investor’s heirs--specifies.

Because annuities and charitable remainder trusts can be set up to pay a specific amount every year until death, they eliminate the need to hoard a huge amount of money in case life lasts longer than expected. By reducing anxiety, they allow people to set aside certain funds for the future and spend the rest now, Pollan says.

*

For planner Mullen, who consulted with the Buchs first, the main consideration was whether the couple could retire early and how their investments might be aligned.

As Mullen sees it, the couple, who are now saving about $100 a month each in their workplace retirement plans and about $10,000 a year or so beyond that, need to be saving more over the next at least 15 years if they want to retire in their 50s and not have to tap into their retirement accounts prematurely.

The couple already have a good-size nest egg. During their more than 10 years flying Boeing 737s up and down the West Coast, John and Linda have accumulated close to $1 million in assets.

They each have about $170,000 invested in a broad spectrum of mutual funds in their employee-directed retirement account with the airline, plus about $150,000 each in UAL Corp. stock. The stock is in an employee stock-ownership program and part of their compensation as pilots. They have $81,000 in a credit union savings account; a combined total of $14,000 in individual retirement accounts, with most of that in mutual funds. They also have about $100,000 invested in individual stocks in a portfolio that includes shares in technology and telecommunications companies and utilities, among other kinds of businesses, along with a few mutual funds. Added to the mix are two rental properties valued at around $840,000, in which they have about $200,000 in equity.

If the couple begin saving an extra $1,450 a month, Mullen said, and if that and their UAL stock and workplace retirement plans return an average of 10% a year, the Buchs could not only maintain their current lifestyle in retirement but have $15 million in assets by the time John turns 83. Although the Buchs felt a 10% annualized return was a bit optimistic--many financial advisors prefer to use 7% to 9% in making such projections--they still were surprised to see how many millions their nest egg could be worth in about 40 years’ time.

One key element in the scenario is that John and Linda can expect generous company pensions. If John retires at 55 and Linda at 50, UAL’s pension plan would pay them a combined total of about $94,000 a year when both are retired.

*

For John and Linda, putting away an additional $1,450 a month wouldn’t be much of a stretch. They take home more than $9,000 a month. Their main obligations include the $2,200 monthly rent for a condominium in the South Bay, $700 a month above rental income for taxes and upkeep on the properties they own, and the money the busy pilots spend on meals out. “Food is expensive, and we eat out 80% of the time,” John said. The Buchs would like to buy a home eventually, but they feel no need to do it right away.

They paid cash for their cars--a 1994 Mercedes C220 and a 1993 Jeep Cherokee--and have no credit card debt. They frequently travel all over the world, including ski trips to Canada in the winter and visits to New Zealand every spring, but they are careful not to bust their budget. Free plane tickets, of course, help.

In general, Mullen felt that most of the Buchs’ investment choices were fine. Currently, about 70% of the savings in their employer retirement plans is in equity funds and 30% is in bond and money market funds.

In devising a plan for the extra new savings she suggests, Mullen recommended that it be invested as tax-efficiently as possible, with 20% going into tax-free bond funds and 80% into stock index funds.

“This strategy will satisfy their moderate investment concerns and greatly reduce taxes while both are working,” Mullen said.

Specifically, Mullen recommended Vanguard funds, a fund family known for its low expenses. Index funds, because they seek to replicate the performance of a particular stock index, by definition have portfolios that are not actively traded. Mullen recommended dividing the new contributions as follows: 40% in Vanguard Index-Trust Total Stock Market Portfolio (five-year average annual return: 18.4%), which follows the Wilshire 5,000; 20% in Vanguard International Equity Index European Portfolio (five-year average annual return: 15.9%), which follows the Morgan Stanley capital international Europe index; and 20% in Vanguard Index Trust Small Capitalization Stock Portfolio (five-year average annual return: 16.4%), which follows the Russell 2,000 index of smaller stocks.

“These funds I selected have as low as 3% turnover rates . . . Because there is less turnover they aren’t having to pay the taxes year in and year out,” Mullen explained.

Mullen suggested splitting the remaining 20% among Vanguard California Tax-Free Insured Long-Term Municipal Bond (five-year average annual return: 7.6%) and Vanguard California Tax-Free Insured Intermediate Term Municipal Bond (fund is less than 5 years old). According to fund tracker Morningstar Inc. of Chicago, these two funds have the lowest expense ratios for California municipal bond funds.

To reduce the couple’s tax bite further, Mullen recommended taking the $81,000 in their credit union savings account, the interest on which is taxable, and placing it in a short-term California tax-free money market account instead. This kind of account is available at all of the major brokerages and fund companies. That money could still be easily tapped should the Buchs want it for a home down payment or to handle an emergency.

John and Linda indicated that they wanted to keep devoting some money to individual stock investments--they refer that as their “crazy,” “speculative” money--and Mullen didn’t object.

Pollan, however, suggested that the couple sell their individual stocks and put the money into mutual funds. “I would broaden the risk with true and tested mutual funds,” he told them.

Regardless of what else they do, Mullen said, the Buchs should set up a will and estate plan in case either or both should become incapacitated or die. She suggested that this matter might best be done with trusts.

After taking it all in, John and Linda said they felt Mullen’s advice was sound and that they were stimulated by Pollan’s ideas. But they want to take some time before deciding on anything, saying they weren’t sure if either’s advice answered all their questions. They’re happy, however, to have options to consider.

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Lynda Natali is a regular contributor to The Times. To participate in a 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.

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Rethinking Savings

Setting goals is an important part of financial planning, and sometimes that means going beyond certain assumptions.

* Why retire? Many people can enjoy working and earning money that way for many years beyond age 65.

* Why leave your money at death? Give it away sooner, when it may be put to better use.

* If you’re worried about outlasting your money, consider such investments as annuities and reverse mortgages as you age, in order to assure yourself of income.

This Week’s Make-Over

* Investors: The Buchs, John, 44, and Linda, 34

* Occupations: Airline pilots

* Combined gross annual income: About $300,000

* Financial goal: Devise an approach that will allow for early retirement yet preserve capital

Current Portfolio

* About $170,000 each in employee-directed retirement plan with United Airlines; accounts are invested in a broad spectrum of mutual funds

* About $150,000 each in UAL Corp. stock, in employee stock-ownership program

* About $81,000 in a credit union savings account

* About $14,000 in IRAs, with most of that in mutual funds

* About $100,000 in various individual stocks and a few mutual funds.

* About $200,000 in equity in two rental properties valued at around $840,000

Recommendations from Margie Mullen

* Increase savings outside workplace plan, which currently work out to about $800 a month, by $1,450 a month. Put this extra new savings into mutual funds, with 20% in tax-free bond funds, and 80% in stock index funds.

* Place credit union savings in a tax-free money market account.

* Draw up wills and set up an estate plan

Recommended Mutual Funds

Vanguard Index Trust Total Stock Market Portfolio: (800) 523-8398

Vanguard International Equity Index European Portfolio

Vanguard Index Trust Small Capitalization Stock Portfolio

Vanguard California Tax-Free Insured Long-Term Municipal Portfolio

Vanguard California Tax-Free Insured Intermediate-Term Municipal Portfolio

Recommendations from Stephen Pollan:

To obviate the need to accumulate and maintain an oversize nest egg:

* Don’t plan on retiring completely. Expect to work--and earn money--indefinitely. Don’t become dependent on one employer.

* Make sure insurance coverage is sufficient in case of health problems.

* Consider annuities or charitable remainder trusts as way to ensure a stable income in later years.

Meet the Planners:

Margie Mullen is a fee-only certified financial planner with Mullen Advisory in Los Angeles. She specializes in retirement planning and portfolio management.

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Stephen Pollan is a financial consultant based in New York and a frequent commentator for magazines and television. He is the author or co-author of several books on finance, including the recently published “Die Broke,” written with Mark Levine.