Delayed Gratification

Todd and Kathy Murphy wake up to stunning views of Big Bear Lake. They fish, hike, ski, always delighting in the lush scenery that surrounds them.

Unfortunately, Todd gets to enjoy this idyllic setting only on weekends.

The couple own a four-guest-room bed-and-breakfast in Fawnskin, a hamlet just north of Big Bear. Kathy, 50, runs the inn from their home, a cottage adjacent to the main building on the one-acre property. Todd, 53, Orange County’s transportation authority manager, catches a commuter plane early in the morning and doesn’t return until well after dark.

Todd wants to scale back on work in a few years, saying he’d even be willing to take a lower-paying position if it would keep him close to home and end his two- to four-hour daily commute.

“I enjoy working and I have a wonderful job right now, but the commute sucks,” he said. “This winter was particularly horrible.”

Kathy also is eager to have her husband working closer to home.

“On days when he got on the plane and I went out for a hike, I’ve said to him, ‘You missed the most beautiful day,’ ” said Kathy, a former real estate marketing researcher. “I feel bad about that because I know he would love to be with me.”

The key for the Murphys, said Laura Varvel, a fee-only certified financial planner based in Bryan, Texas, might be that they’ll have to wait a few years longer than they’d like before making any major changes in their situation. In the meantime, the challenge for the couple is to find a balance between their desire to move forward with their dreams and a need to ensure a secure retirement, Varvel said.

Now that the couple are completing renovations to the inn, they expect to start saving more, for a total of about 18% of their combined income, which averages about $112,000 a year. So far, they’ve accumulated about $83,000 in individual retirement accounts and have $110,000 in Todd’s tax-deferred 457 retirement savings plan at work. They also have about $200,000 in equity in the inn and $15,000 in equity in a one-sixth share of a Maui condominium now on the market for $190,000.

They keep a total of about $40,000 in personal and business checking accounts. Their only debt is the $250,000 mortgage remaining on the Fawnskin property and the $15,000 mortgage on the Maui condo. Their three grown children are financially independent.

The Murphys usually indulge in several vacations a year. For instance, Todd has a goal to have skied on 100 different slopes by the time he’s 60. With the count now at 67 slopes, he and Kathy expect to be taking plenty of ski trips in the next seven years.

Within the next few years, the Murphys might also be replacing their automobiles, a 1990 Toyota 4-Runner and a 1993 Ford Ranger.

Given the couple’s relatively modest savings, much of their retirement security will depend on Todd’s pension. Todd therefore must be particularly prudent about choosing a retirement date, Varvel said.

“The difference in your pension between retiring at 55 and at 60 is huge,” Varvel explained. If he retires at age 60, she pointed out, he would get $5,200 a month; if he retires five years earlier, his pension would drop to $3,200.

Varvel said that as a compromise, Todd might look into whether he can reduce his hours at his Orange County job when he hits 55 but that he not retire from it fully or switch employers until he turns 60. “I’m not comfortable with how tight things would be if you left at age 55,” Varvel told Todd, saying he could end up having to try to find a new job in the Big Bear area when he’s past 60.

Alarmed by the difference, Todd said he definitely will reconsider his plans for early retirement. Todd, whose job requirements wouldn’t allow telecommuting, said he eventually might be able to reduce his hours.

“If it comes down to working a few more years at this job, that would be OK,” he said.

The Murphys, who have been married 21 years, bought the log-cabin-style property at Big Bear Lake in 1996, after selling their home in Yorba Linda, where Todd served eight years on the City Council and one year as mayor.

They, like many other bed-and-breakfast owners, figured owning an inn would be a way for them to afford to live somewhere woodsy and serene, something they had long wanted to do.

“We looked at old hotels and fishing lodges, but they weren’t right,” Kathy said. “I knew the minute I drove up to the inn it would be my house. I absolutely love it here. I feel so lucky I get to live in a place I love.”

Although keeping the bed-and-breakfast spotless is a challenge, Kathy said, she feels well-suited to inn-keeping because she enjoys meeting new people, cooking and entertaining.

“It’s exactly what I thought it would be like, except for the cleaning--but I don’t have one regret in the world,” she said.

The Murphys paid $405,000 for the property and have spent about $55,000 on renovations, which included adding the cottage where they now live. The inn nets the couple between $1,200 and $2,500 a month.

Since they don’t foresee having to spend much more on renovations, they figure they’ll soon be able to save about $20,000 a year--as long as Todd keeps his current job.

They plan to sell the inn when they reach their late 60s, at which time they would retire completely, and perhaps buy an inexpensive home, possibly in another area.

The Murphys consider themselves conservative investors, people who don’t like to rack up debt or gamble on risky stocks. In fact, Todd, nervous as stock prices continued to climb ever-higher last year, switched nearly all his 457 investments over to fixed-income.

But Varvel said that overall, the Murphys need to be more aggressive, that they’ll be better off in their retirement years if they can bring themselves to stretch their risk tolerance just a bit. A good target for them would be an overall average annual return of about 8% on their non-real estate investments, she said.

She recommended an overall breakdown for these investments of 40% in bond mutual funds, 28% in large-cap funds, 18% in international funds and 14% in small-cap funds.

As for specific changes, Varvel suggested that first, the couple should steer most of the emergency money in their personal checking account and the money they keep in their business checking account into money market mutual funds. These will pay higher interest--many pay more than 5%--and allow check writing.

New savings invested outside retirement accounts should be directed to a bond fund such as Vanguard Short-Term Corporate Portfolio (five-year average annual return: 5.9%).

Todd should aim for higher returns in his 457 plan, Varvel said. His current choices are bringing annualized returns of about 6.15%. However, because Todd can redirect only 20% of current 457 fixed-income assets into stock funds each year, it will take a few years for him to achieve Varvel’s recommended apportionment: roughly 47.25% in an index fund that tracks the Standard & Poor’s 500, 34% in an intermediate-term bond fund, 8.75% in a growth fund and 10% in an international stock fund.

New contributions to the plan would follow a similar diversification pattern: 40% in bond funds, 28% in the large-cap index fund, 14% in a growth-stock fund and 18% in international.

Varvel also recommended that Todd increase his annual allocation to the plan from the previous maximum of $7,500 to the new one of $8,000.

Next, the planner turned to the Murphys’ IRAs, which are with a full-service brokerage and are invested mainly in load mutual funds. The IRAs have been earning above-average returns, but, because load funds tend to have higher ongoing expenses, Varvel suggested--although it was by no means a strong recommendation--that the couple might want to consider switching to no-load funds and to a discount brokerage. She acknowledged that costs--although they are important and in fact are one of the few things under investors’ own control--shouldn’t be the only consideration in such a situation. Many people who buy load funds and patronize full-service brokerages do so because they like the brokers’ advice and the sellers’ services. However, Varvel would remind investors that in buying a load fund or patronizing a full-service brokerage, investors are in effect paying for advice through the commissions, so they should be sure they’re getting what they’re paying for.

In any event, the Murphys’ IRA portfolio is somewhat heavily concentrated in financial services funds and needs greater small-cap and international exposure, Varvel said.

In fashioning a new IRA portfolio, Varvel suggested choices from no-load mutual fund families whose reputations she respects. (It should be noted that fee-only planners such as Varvel will generally suggest no-load funds.)

Assuming the Murphys would want to overhaul their IRA portfolio, then, they would put $37,200 into Loomis Sayles Bond (five-year average annual return: 11.5%); $11,100 into American Century-20th Century International Discovery (fund is less than 5 years old), which invests primarily in small European companies; and $11,100 into Montgomery Emerging Markets (five-year average annual return: 1.9%). They would put $23,500 into Vanguard Index-Trust Small Capitalization Stock Portfolio (five-year average annual return: 17.1%), or, as an alternative, put $11,750 in Vanguard Small-Cap Growth and $11,750 in Vanguard Small-Cap Value, both of which are new funds.

Taking note of the couple’s nervousness about stock risks, Varvel offered this thought about investing in emerging markets such as in Asia and Latin America, where market values have generally declined 30% to 50% in the last year: “I don’t think they’re going to drop much further, but if they take a nose dive, don’t get out. You have to see yourselves as long-term investors.”

As a precaution, Varvel urged the Murphys to draft wills and to buy about $350,000 in term life insurance so that Kathy would not face a hardship should Todd die unexpectedly.

Overall, Todd said he found Varvel’s recommendations “extremely helpful.”

“I’ve thought about diversifying our investments,” he said. “I’m pretty sure we’re going to be making some changes.”

*

Diane Seo is a regular contributor to The Times. To be considered for a published 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.

Information about choosing a financial planner can be found at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Situation

* Investors: The Murphys: Todd, 53, and Kathy, 50

* Income: About $112,000

* Goals: Reduce Todd’s workload; early retirement

* The plan: The couple can probably afford to have Todd leave his present job at 60 but not before. He will see whether it’s feasible for him to cut back his work hours before then.

This Week’s Make-Over

* Investors: The Murphys, Todd, 53, and Kathy, 50

* Occupations: Todd, county transportation authority manager; Kathy, innkeeper

* Combined gross annual income: About $112,000

* Financial goals: For Todd to begin scaling back on employment in a few years and to retire completely in 10 to 15 years

Current Portfolio

* Real estate: About $200,000 in equity in home/inn property in Big Bear area, with about $250,000 remaining on mortgage; $15,000 equity in share of a Maui condominium on which they owe $15,000

* Retirement accounts: About $110,000 in Todd’s tax-deferred 457 workplace plan, nearly all invested in fixed-income vehicles; combined total of about $83,000 in two IRA accounts with Prudential Securities, invested mostly in mutual funds

* Cash: $25,000 in personal checking account; $15,000 in business checking account

Recommendations

* Reconsider Todd’s early-retirement plans with an eye to the pension consequences; explore possibility of scaling back hours at current job

* With retirement savings, aim for an overall allocation of 40% in bond mutual funds, 28% in large-cap stock funds, 18% in international funds and 14% in small-cap stock funds. Put future non-retirement-account savings into a short-term bond fund.

* Invest Todd’s 457 savings more aggressively, realigning what he’s saved so that 66% is in stock mutual funds and the rest is in bond funds. Future contributions would follow a similar allocation.

* Increase small-cap and international exposure in IRA portfolio, which is somewhat over-weighted in financial-sector investments.

* Transfer most of money kept in bank checking accounts into a money market account, to earn more interest.

* Draw up wills; purchase 15-year $350,000 term life insurance policy on Todd

Recommended Mutual Fund Choices for Non-Workplace Savings

* American Century-20th Century International Discovery:(800) 345-2021 * Loomis Sayles Bond: (800) 633-3330

* Montgomery Emerging Markets: (800) 572-3863

* Vanguard Index-Trust Small-Capitalization Stock Portfolio: (800) 992-8845

* Vanguard Short-Term Corporate Portfolio

* Vanguard Small-Cap Growth

* Vanguard Small-Cap Value

Meet the Planner

Laura Varvel is a fee-only certified financial planner with Briaud Financial Planning in Bryan, Texas. She specializes in financial planning for high-net-worth individuals. She is a member of the National Assn. of Personal Financial Advisors and the Institute of Certified Financial Planners.

Finding a Financial Advisor

These groups will send you lists of member advisors in your area

* American Institute of Certified Public Accounts (personal financial planning division)

Phone: (800) 862-4272

* Institute of Certified Financial Planners

Phone: (800) 282-7526

Web site: https://www.icfp.org

* International Assn. for Financial Planning Phone: (800) 930-4511

Web site: https://www.iafp.org

* Licensed Independent Network of Certified Public Accountants (fee-only CPAs)

Phone: (800) 737-2727

* National Assn. of Personal Financial Advisors (fee-only planners)

Phone: (800) 333-6559

Web site: https://www.napfa.org