Carl and Ruby Hoffman are middle-aged, they're healthy, they have a significant nest egg and retirement income, and their ancestors lived long, long lives.
So what's the worry?
Something all of us would like to be in a position to worry about: deciding on a strategy for preserving wealth and for providing well for the generations after them. For that, they wanted to get some advice from a professional.
Tim Kochis, a fee-only financial planner in San Francisco, confirmed that Carl, 64, and Ruby, 57, are indeed in great financial shape and that, barring any great catastrophe, should be able to count on being comfortable into their mid-90s.
It wasn't all luck that put the Orange County couple into this happy predicament. Yes, they were fortunate enough that Carl, who has a doctorate in experimental psychology, had a well-paying career. They also benefited from having bought their four-bedroom home in Orange in 1969, for $42,000, which the couple estimate is now worth around $250,000.
In fact, the single-most important thing the Hoffmans did was not leave the future to chance.
That was a precept Carl learned as a teenager from his father, who had lived through the Great Depression and saw the importance of investing to provide for a family's needs down the road. The elder Hoffman gave his son a few shares of utility stocks to get him started.
And in the early '60s, when Carl was starting his own family, he began to get serious about saving and investing, participating in a savings plan at Rockwell, where he worked as an engineer, and starting a portfolio of stock mutual funds.
In 1980, when he joined Aerospace Corp., their two children were in college, and, said Carl, "I was getting older--I realized I had to start to build a retirement." He kicked his savings plan into high gear, setting aside the maximum allowable of his pretax income into the plan--around $750 to $800 a month--into a tax-deferred 403(b) retirement savings plan offered through the then-nonprofit defense research laboratory in El Segundo. He directed the bulk of his 403(b) savings into money market mutual funds.
After Carl retired from Aerospace in 1994, he rolled his 403(b) money into individual retirement accounts now invested in a mix of seven Putnam Investments stock mutual funds, worth about $420,000 today. They are: Fund for Growth & Income (five-year average annual return: 19.4%); International Growth & Income (five-year average annual return: 19.1%); two growth funds, Vista (five-year average annual return: 20.2%), and New Opportunities (five-year average annual return: 25.9%); and three funds less than 5 years old: International New Opportunities and Capital Appreciation, both growth funds, and New Value, a growth-and-income fund.
Carl also has an annuity with Canadian Life.
Ruby, for her part, did some part-time work when the couple's son and daughter were young, but she thought it important that she stay home while they were growing up. In 1980, she went back to work as a bookkeeper, staying with General Accident Insurance Co. until she lost her job when the company moved away. Over that time she contributed to the company's 401(k) and opened an IRA.
She now has accumulated about $150,000, invested in four funds: General Accident Insurance Co. Income Fund (five-year average annual return: 7.41%); Fidelity Equity-Income II (five-year average annual return: 19%), a large-cap stock fund; SteinRoe Special (five-year average annual return: 16.5%), a mid-cap stock fund; and Vanguard Windsor (five-year average annual return: 19%), a growth-and-income fund.
But even well-informed, prudent investors such as the Hoffmans can make mistakes, and Carl acknowledges a few missteps along the way. In the late 1970s, hoping to make a fast buck, he acted on some tips from friends and neighbors. He put $6,000 into an oil-drilling venture and ended up losing about $4,000; he had only broken even on an investment in a Maui time share by the time he sold out 10 years later; he did even worse on a San Antonio apartment house, ending up with just $1,000 on his initial $15,000 by the time he exited that venture.
"I did some dumb things," Carl said. But "I figured I had a certain amount of discretionary money I could play with," he said, meaning that he knew the risks involved with each venture and that he never sank more into them than the family could afford to lose.
As for today, conventional wisdom would have the Hoffmans starting to shift their growth-oriented investments into safer, fixed-income vehicles such as bonds now that they're of retirement age, and that was on their minds in seeking the advice of an independent professional.
Whether that course would make sense for the Hoffmans, though, needs to be considered in light of this question: What kind of income can the couple already count on in retirement?
For the Hoffmans at present, the answer here is plenty. Carl collects a lifetime pension, now $1,756 a month, that will rise with the cost of living; and a little more than $1,000 a month in Social Security. Carl also gets $1,500 a month from his Canadian Life annuity, which will run out in June 2000.
Ruby will begin collecting a pension of $230 a month beginning in 2005, and she will be eligible to draw Social Security in five years.
The other part of the equation is expenses. The couple have recently begun taking trips abroad, but otherwise they try to keep their spending in line. When they remodeled their kitchen late last year, a $10,000 job, Carl took part-time work to finance it.
Still, when their annuity runs out in 2000, they'll face a shortfall of $1,500 a month, and one of their concerns is how they'll make up for it.
Kochis advised Carl not to work, to avoid cutting his Social Security benefits, which are reduced by earned income. "If you work at all, it should only be because you enjoy it, because it's fun," Kochis said. "You don't need it for the money." But Carl, who enjoys working and likes to keep active, hasn't made a firm decision about that.
Although Ruby will be eligible for Social Security benefits at age 62, and she had wondered about collecting them that soon, Kochis advised against that, telling her, "You'd be better off waiting until you're 65 and collecting the whole Social Security." By starting at 62, she'd be cutting her payments by about 15%.
Most of the income difference, then, will have to come from their savings. To consider their investment choices here, Kochis, in response to the couple's initial query about shifting their portfolio to fixed-income instruments, laid out one strategy that would accomplish that gradually: Every five years, starting in three to five years, 10% to 15% of their portfolio would be transferred into short-term and intermediate-term bond funds until, after 30 years, all of their savings would be out of stock investments.
After giving the matter more thought, the Hoffmans say they're inclined to keep the lion's share of their portfolio invested the way it is--in stock mutual funds--for the foreseeable future. If needed, they can make up the income shortfall by taking profits from their stock funds, while the bulk of the portfolio remains invested and earns what they expect will be better returns than bonds in the long run.
"The probabilities are in favor of this being a winner," Kochis said of the couple's decision. "I'm all in favor of people [who are in a situation to do so] having all their money invested in equities and just spend it down, little by little, only taking out as much as they need."
And, in fact, shortly after the consultation, Ruby, in hopes of getting a better long-term return, took the nearly $18,000 she had in the General Accident Insurance Co. Income Fund and put it into Vanguard Index-Trust 500, a mutual fund that tracks the performance of the Standard & Poor's 500 stock index (five-year average annual return: 21.5%).
As the Hoffmans plot their financial future, they also have several matters involving inheritances to address.
Carl's 95-year-old mother, who moved to Orange County from Florida in December, intends to bequeath about $260,000 of her estate to Carl. She has set up a revocable living trust, a legal document that will allow an estate to pass to heirs without going through probate. Estate planning lawyer Leah M. Bishop of O'Melveny & Myers in Century City said that's wise. Without such a document, a court would supervise the transferring of the woman's assets to her beneficiaries, a process that takes time and money and that can be avoided. "There's nothing good I can say about probate," Bishop said.
As for the Hoffmans' own estate, Bishop said, the couple should start thinking about steps they can take now to spare their heirs inheritance taxes and other hassles. Under current law, a husband and wife can pass as much as $1.25 million to their children, with each spouse eligible for a $625,000 exemption, without paying estate taxes (the law increases the amount of the exemption each year through 2006). At present, the couple's net worth is under the ceiling, but it's something to watch.
"It would be a shame," Bishop said, if a bequest from Carl's mother were to push the Hoffmans' estate through the ceiling, resulting in estate-tax charges when the Hoffmans' children inherit from their parents. The family could head off that problem if Carl's mother makes provisions to leave some money directly to Carl's children, Bishop said.
The Hoffmans have already started investigating how to peel off some of their wealth directly to their three grandchildren.
The easiest way to transfer funds without giving young children immediate control of the money is to set up an account under the California Uniform Transfer to Minors Act. Under this law, an individual can give a minor child or children gifts of up to $10,000 total annually without owing a gift tax as long as the funds are used for the minor's or minors' benefit.
Anyone can set up such an account easily at a bank or brokerage firm, Bishop said.
But Bishop offered a warning: The person making the gift should not be designated as custodian, a common error. If the gift giver is listed as custodian, then that person is the one controlling the account, and the Internal Revenue Service will still consider the money in the account part of the person's estate, and thus subject to tax.
As it happens, the Hoffmans have been thinking they will pay private-school tuition, which could run as high as $7,000 a year, for one of their grandchildren, now 3 years old. The interesting point here is that, through a loophole in the law, any person can provide any amount of tuition without subjecting himself or herself to gift taxes as long as they pay the tuition directly to the school.
(It should be pointed out that, whatever the understanding Hoffman family members have among themselves, experts advise that bequests be distributed equitably among family members to avoid squabbles.)
Kochis offered the Hoffmans a few other suggestions in regard to insurance:
* The Hoffmans don't have life insurance, and, in the planner's view, they don't need it.
"There's an old adage in financial planning that if you can afford to retire, you can afford to die," Kochis said. As applied to the Hoffmans, that means that since there are enough resources for both of them to live comfortably for years, there would be enough money for one of them to live comfortably for years.
* Likewise, Kochis doesn't think the couple need disability or long-term care insurance. Put simply, he believes that the couple have sufficient assets that they could get by without buying such coverage, which Kochis believes is overpriced in any case.
One common view on long-term-care needs holds that the very rich and the very poor can always get taken care of, but that the people in between can end up draining all their savings. For those people in the middle, the largest consideration can be whether they are determined to leave money for their children. For other people, the very idea of entering a nursing home is anathema. Those who would prefer to receive nursing care at home might want to shell out for a policy that would cover that kind of situation.
For the Hoffmans, those worries are important but not immediate. They're intent on enjoying their good health and having the time and wherewithal to travel abroad, something they recently started doing.
They toured Italy last fall and will take a cruise around Greece and Turkey in May.
"We've always wanted to travel," Ruby said, but she and her husband were always too preoccupied with raising kids in years past to take foreign vacations.
Now, thanks to good financial planning, they can.
Jennifer Pendleton is a regular contributor to The Times. She can be reached by e-mail at email@example.com. 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. Questions or comments can be left at (213) 237-7288. We cannot respond to all inquiries.
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This Week's Make-Over
* Investors: The Hoffmans, Carl, 64, and Ruby, 57
* Occupation: Both are retired
* Combined gross annual income: About $53,000
* Financial goals: Obtain an independent professional opinion about ways to preserve wealth, manage an expected inheritance, and provide for couple's children and grandchildren
* Real estate: More than $245,000 equity in four-bedroom Orange home
* Annuities: Carl has an annuity with Canadian Life that is paying $1,500 a month until June 2000
* Retirement accounts:
Carl: About $420,000 in IRAs invested in seven Putnam mutual funds: Capital Appreciation, Fund for Growth & Income, International Growth & Income, International New Opportunities, New Opportunities, New Value, Vista
Ruby: Has about $150,000 in IRA and 401(k) accounts, invested in Fidelity Equity-Income II, General Accident Insurance Co. Income Fund, SteinRoe Special and Vanguard Windsor
In The couple's pension and Social Security income is and will be such that they can safely leave most of their savings in stock mutual funds for the foreseeable future. If they need extra income, they can take profits from their stock funds.
* An expected inheritance from Carl's mother and the couple's desire to help family members make it vital that the Hoffmans consider estate planning matters carefully.
Meet the Planner
Tim Kochis is a fee-only certified financial planner based in San Francisco. His firm, Kochis Fitz Tracy & Gorman, specializes in investment planning for corporate executives, professionals and business owners. He is a former national director of personal finance planning for Deloitte & Touche and Bank of America.
Meet the Lawyer:
Leah M. Bishop is a specialist in tax planning for individuals and closely held businesses. She is a partner of the O'Melveny & Myers law firm in Century City.