Pension Investor Weighs the Costs of Keeping It Simple

Robert Bedrick hates fretting about money or the future. He lives for today and prefers to keep his finances and his retirement planning simple and hassle-free.

However, the 42-year-old West Hollywood resident has been forced to focus his attention on his long-term security. Early last month, his employer, Swissair, terminated its pension program.

This month, Bedrick has to decide whether to take a lump-sum payment of $87,000, transfer it to a retirement account or direct the money into a life annuity that would guarantee him monthly payments of about $1,600 starting at age 65.

“I was thrown for a loop because for the last 20 years, I was under the assumption that I was covered by the pension plan,” Bedrick said. “Every year, I received a statement telling me how much I would receive from my pension and from Social Security, and it looked good. But then I got a notice saying the pension would disappear.”

Bedrick’s situation is complicated by the fact that he is HIV-positive. Because he’s been symptom-free since he was tested three years ago, he’s optimistic and planning for a normal life span. Yet he’s not sure how the potential for illness should play into his financial planning.

Meloni Hallock, a partner at Ernst & Young in Los Angeles who specializes in personal financial planning, said that before Bedrick makes a move, he should set goals. “You need to think about what this money is supposed to accomplish both for the long term and short term,” she said.

Furthermore, Bedrick’s desire to minimize financial paperwork and decision-making will have a cost. It may be worth it to him, but he needs to be aware that time invested in learning and organizing his finances is likely to pay off in the long run.

Generally, Bedrick said, he wants to have a secure retirement and maintain a simple lifestyle. He rents his apartment for $860 a month and, although it would be nice to own a home, he said, staying a renter means less responsibility and less time working on household matters.

Bedrick does not own a car, saying he preferred to have a nicer apartment. “I’m from New York, so I know how to take the bus.” His preference for fewer hassles also means he wants a life with as little paperwork as possible.

“In general, I’ve had enough headaches, so I like to keep things simple,” he said. “Work consumes me, so after I come home from work, I just want peace and quiet. I really don’t want to think about money.”

As an airline manager overseeing baggage handling and passenger check-in, Bedrick draws an annual income of $43,200, plus about $1,540 in overtime. Aside from the money in his pension, his only savings is about $2,500 in his credit union account and about $1,500 in a Roth IRA. He is also paying down $3,000 in credit card debt and $6,000 owed on a line of credit.

He started accruing debt about 15 years ago, when he moved to Los Angeles from New York. At one point, he estimates he was about $30,000 in the red, primarily because of overspending.

“I led the high life,” he said. “I was a typical disaster case.”

But about four years ago, he made a conscious effort to buckle down financially. He paid off $4,200 in student loans, and he’s made considerable progress toward his debt by diligently making payments each month and limiting himself to $100 a week for food, entertainment and transportation. He’s confident he will be debt-free by 2001.

“What’s left is a piece of cake,” he said. “It was very simple to pay off some of my bills. I basically stopped going out at night. I got sick of the singles scene, and it actually worked out for me.”

Although he simplified his life, Bedrick has felt unnerved as Swissair has made cuts in recent years, downsizing staff and outsourcing services.

“I do have some job insecurity,” he said. “Although there might be some potential for moving up with the company, I can’t count on it. If I had a clean bill of health, I wouldn’t worry as much. But because of my situation, I’m not sure how easy it would be for me to get another job.”

Bedrick’s first step, Hallock said, is to seek low-interest credit card deals to help him pay down his debt sooner than he had planned. Bedrick is paying 13.4% interest on his credit card and 18% on his line of credit.

“When you get deals in the mail, why don’t you read what they say?” Hallock suggested. “You’re a prime customer because you do pay your bills and pay interest.”

Although Bedrick recognized that he could save some money that way, he had previously resisted spending time evaluating and filling out credit card offers. He feels he has a handle on the debt and that he’ll have it paid off soon in any case.

Because Bedrick is grappling with job and health uncertainties, Hallock said it’s particularly important for him to establish an emergency fund equivalent to three to six months of expenses, or between $6,000 and $12,000. Once his debt is paid off, he should direct any extra cash to a money market fund and designate it for emergencies, Hallock said.

“No one’s job is secure until retirement,” she said. “If something does happen, I would like for you not to have to take out a loan or run up your credit cards again.”

Regarding Bedrick’s immediate decision on the pension lump sum, Hallock and other financial planners contacted by The Times agreed that he should skip the annuity option and narrow his choice to rolling the funds into the employer’s new 401(k), which is replacing the pension program, or an IRA.

Hallock said the annuity available to Bedrick would be the best choice only if Bedrick lives until a very old age, because it pays a fixed amount from retirement until death. The money would not be available before age 65 and no part of it would be paid to his estate if he died earlier.

“If you take the lump sum, you have access to the principal, whereas in an annuity, what you’re getting is just cash flow,” Hallock said. “If you feel you need money because your health changes, the annuity isn’t going to give you that.”

Both the 401(k) and IRA would allow his nest egg to continue to grow tax-deferred. Each would enable Bedrick to control the portfolio and allow some form of penalty-free hardship withdrawals before age 59 1/2, but the IRA offers more options. An IRA can be set up at a brokerage and allows investment in stocks, bonds, mutual funds and certain other financial assets.

“An IRA gives you the ultimate in flexibility,” she said. But, “I can understand your hesitancy about taking responsibility since you’re new to investing.”

Initially, Bedrick said he was attracted to the annuity because he liked the fact that someone would manage his retirement money for him. “The pro for the annuity is: out of sight, out of mind,” he said.

However, he was dismayed to learn that if he dies before 65, he can’t pass his money to his family if it’s locked in an annuity.

“I would be annoyed if someone couldn’t benefit from it,” he said. “I feel I’ve worked hard for this money, and it should go to someone. But I’m nervous to take the lump sum because I know absolutely nothing about investing. And I don’t want retirement planning to become a part-time job. To have to devote 10 hours a week to this is more than I care to hear about.”

Hallock told Bedrick not to get overwhelmed. She encouraged him to learn some basics about investing, so he could feel confident about his choices. She suggested he invest 70% of his retirement savings in a diversified selection of mutual funds, including large-, mid- and small-capitalization portfolios as well as international funds. About 30% should be in fixed-income or bond funds.

Planners suggest that everyone learn at least something about investments and take responsibility for it, because it can be risky to put your financial well-being completely in someone else’s hands. Some planners note there are simple investment options available--Bedrick could, for example, put 70% of his money in an equity index fund and 30% into a conservative bond income fund and review the holdings only occasionally.

Choosing his 401(k) may be a kind of compromise for Bedrick, according to Hallock and Neal Frankle, a certified financial planner in Woodland Hills who also considered Bedrick’s situation.

The 401(k) “is not a bad choice given that he wants simplicity,” Frankle said. The company’s offering has a selection of American Century and J.P. Morgan mutual funds. “Those mutual funds should do all right,” Frankle said. Bedrick has started contributing 6% of his pay to the new 401(k) plan, putting 80% in equity funds and 20% in a bond fund. Swissair is matching dollar for dollar up to 4%.

It’s important to take personality into account when preparing a financial plan, Frankle said, and make some compromises to accommodate personal preferences. But investors must recognize trade-offs--they pay for the privilege of thinking less about their investments. The 401(k) may make sense for Bedrick’s pension funds, but he shouldn’t always gravitate to the easiest option. For example, Bedrick might think more about the hundreds of dollars he might save by spending a half-hour filling out a credit card application against the importance of not feeling hassled.

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This Week’s Make-Over

* Investor: Robert Bedrick, 42

* Gross annual income: About $43,000

Goals

Find best way to invest lump sum from pension plan while keeping financial life simple.

Current Portfolio

Savings:

* Credit union savings account: $2,500

* Pension rollover: $87,000

* Roth IRA: $1,500

Debt: $9,000 in consumer loans at 13% to 18%

Recommendations

* Take lump sum from pension program and roll it over into 401(k) or IRA.

* Take advantage of low-interest credit card deals.

* After paying down debt, set aside $6,000 to $12,000 in emergency fund.

Meet the Planner

Meloni Hallock is a certified public accountant, certified investment management analyst and partner at Ernst & Young in Los Angeles. She has extensive experience in planning for senior executives and wealthy clients. She was named one of the nation’s 250 leading financial planners this year by Worth magazine.