Facing the World Beyond Grief and Illness
Bonnie Hilberg has suffered more than her share of setbacks.
Within the last several years, death has claimed her husband, a daughter and a grandchild. She also has undergone the stress of two long-distance moves during that time--and then battled breast cancer.
But focusing on her remaining relatives, including three other grandchildren, has helped the 64-year-old San Diego resident maintain a remarkable degree of optimism.
Now that she is recovering from radiation treatment and emerging from grief, Hilberg is starting to think about her future. Her goals of learning to manage her late husband’s investment portfolio and restarting her small business are lights in a tunnel of personal loss.
Like many new widows, Hilberg did not know much about the family finances, which had been handled almost exclusively by her husband. She couldn’t define the difference between stocks and bonds. She had never read an account statement. She didn’t know the amount or type of investments her husband had accumulated during their 44-year marriage.
“I would offer suggestions that we should have a financial planner,” Hilberg recalled, “but he said, ‘I’m doing a good job of taking care of us.’ I had no idea of how much money we had.”
Of one thing Hilberg is certain: She doesn’t want to outlive her nest egg, which totals nearly $160,000 in an individual retirement account. That long-term desire--and an immediate need for more income--prompted Hilberg to volunteer for a Money Make-Over.
Her monthly Social Security check for $1,071 covers only her rent, so Hilberg has been forced to spend most of the $10,000 from her husband’s life insurance policy to pay routine expenses. Those proceeds are about to run out, but she is reluctant to withdraw any money from the IRA or move to less expensive quarters.
With that in mind, the industrious and determined Hilberg began job hunting this summer, when her health improved. Several weeks ago a residential complex for senior citizens hired her as a part-time receptionist, a position that pays about $7,400 a year.
Hilberg prefers part-time work so she can be free to relaunch a business she had operated before she was sidetracked by two moves and three funerals. At its peak in the early 1990s, Bonnie’s Bridal Connection generated more than $1,000 a month in income for Hilberg, who was a buying agent for discounted bridal gowns, invitations and other accessories. Hilberg would like to surpass that performance.
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Bonnie J. Daigh, a certified financial planner in Rancho Bernardo who reviewed Hilberg’s finances at The Times’ request, said that while Hilberg’s efforts to earn extra income are admirable, she should relax a little.
Daigh urged Hilberg to start withdrawing a small amount from the IRA, specifically about $700 a month in dividends from its stocks and mutual funds. This would increase her income now.
“Bonnie needs this money now to cover her monthly expenses,” Daigh said. Hilberg may resume reinvesting her dividends in her IRA later, when she knows her new job adequately supplements her Social Security income and as her business grows.
In any case, federal law requires her to start taking regular IRA distributions in six years, when she reaches age 70 1/2.
“Most retirees don’t want to touch principal,” Daigh said, “but at some point in time they may have to use principal to live comfortably. They shouldn’t be afraid to use principal, especially as they get older. When you’re in your 80s, how much do you want to be concerned about principal?” Until that time, relying on dividends conserves principal and is a convenient way to withdraw money from an IRA.
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Hilberg, who describes herself as frugal, is also very concerned about minimizing taxes, especially if she is making IRA withdrawals, which are taxable.
Daigh noted that Hilberg has plenty of room to withdraw dividends, work part time and operate her business without losing any part of her Social Security benefits or making them taxable. She will probably stay in the 15% marginal federal income tax bracket, the upper limit for which is $25,750 for singles. That’s also close to the income level that would make some of her Social Security taxable.
Hilberg should keep tabs on her income--especially if her business prospers. In addition to the tax issue, Social Security reduces benefits directly if employment income exceeds certain amounts. The earnings limit is set at $17,000 for 65-to-70-year-old singles during 2000, when Hilberg turns 65. For every $2 above $17,000, $1 is subtracted from Social Security benefits. Her IRA or other investment income would not be included in that calculation.
There is no earnings limit at age 70 and older, but if Hilberg nears the limit in the next few years, she can reinvest in her business or take other steps to reduce income.
Hilberg said she plans to apply any profit from selling wedding items to developing and advertising her business. Likewise, she would prefer reinvesting her IRA’s dividends, but she is willing to start tapping them to make ends meet.
Daigh suggested that Hilberg adjust her portfolio to provide more income and reduce risk. By changing some of the investments, Hilberg could earn up to $900 a month in dividends, Daigh calculated. Because the investments are sheltered within an IRA, any profit from selling to rearrange the portfolio would not result in capital gains taxes.
“You might consider switching common stocks to preferred stocks, which act more like a bond with an 8% dividend, versus a 1% or 2% dividend for common stocks.” Daigh also favored shedding some of the more volatile individual stocks to invest in mutual funds, which offer more diversity, stability and potential safety through ownership of many stocks.
Another reason Hilberg should restructure her portfolio is to simplify it. “You have 17 different holdings. It’s too much to keep track of,” Daigh said. “Ten to 12 would be about the maximum.”
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Martin S. “Duke” Johnson, a financial advisor and money manager who runs the La Jolla Institute for Wealth Management, also studied Hilberg’s portfolio at The Times’ request. He agreed with Daigh that Hilberg should reduce the number of investments, seek more income, reposition a money market fund to get more returns and eliminate some riskier holdings. His plan doesn’t maximize income--it leaves about a quarter of the portfolio in stocks to increase the likelihood its value would rise in the long term.
Now is the right time for Hilberg to make changes because more than a year has passed since her husband died, Johnson said, and she is better prepared emotionally to deal with finances.
“When we have clients who lose a spouse, we advise them not to make any major investment decisions for a year. We want to avoid any quick judgments or hasty decisions,” he said. “We look at insurance benefits and make sure the immediate needs are met, but we put everything else in a holding pattern.”
Johnson and Daigh asked Hilberg to update her will, which was drafted outside California before her husband and daughter died.
Identifying new beneficiaries, rewriting a will and delving into estate planning are too difficult immediately after the death of a spouse, Daigh said, recalling her own experience last year, when her husband died. “It’s an overwhelming time.”
All too often Daigh and Johnson find that their newly widowed clients--especially women in their 60s and older--know little about handling money. One thing Hilberg realizes now, she said, is that a greater amount of life insurance coverage for her husband would have lessened the pressure she now feels to earn more income. “I wish I had pushed a little more to learn about our finances.”
But now Hilberg is ready to take control. One way for her to reduce the number of investments in her IRA, Johnson said, is to eliminate redundancies with an eye toward unloading some of the riskier holdings. By retaining existing investments where it makes sense, Hilberg could minimize commissions or other transaction charges.
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Johnson recommended selling the two international mutual funds, Oppenheimer Global (five-year annual average total return, 16.8%) and Schwab International Index (five-year average annual total return, 12.1%), which tend to be more volatile than domestic equity funds. Conservative investors such as Hilberg can more safely include a foreign component to their portfolio by investing in U.S. corporations that do business around the world, and many stock funds feature such companies.
He suggested that Hilberg keep Zweig Total Return (five-year average annual total return, 7.4%), a broadly diversified closed-end fund that features some international holdings, including the securities of foreign governments.
Hilberg’s IRA contains three short-term bond funds, but she needs only one such holding. Johnson proposed jettisoning Strong Short-Term High-Yield Bond (one-year annual average total return, 7.9%), featuring bonds that offer a greater return for more risk. “If the economy slows down, junk bonds aren’t the place to be.” Hilberg could keep Hotchkis & Wiley Low Duration (five-year average annual total return, 7.1%) or Dreyfus Short-Term Income (five-year average annual total return, 7.0%), which both have good track records; but Johnson was more keen on Dreyfus, based on its long-standing reputation for managing high-quality, fixed-income funds. (Based on that preference, the Hotchkis & Wiley fund is shown as one to be sold in the accompanying table.)
Hilberg should keep the mortgage-backed bond, Johnson said, because it provides high cash flow from principal and interest and a competitive return. And selling a single bond is expensive.
Like Daigh, Johnson advocated eliminating some of the individual common stocks. His picks to sell were Compaq Computer, Costco Wholesale, E-Digital, Price Enterprises and Sunshine Mining & Refining.
He advised Hilberg to keep her two preferred stocks, MCI Capital and Price Enterprises, because of their high dividends. He also advised retaining two common stocks with significant yields: Ford Motor, a cyclical but reliable performer, and Merck, the pharmaceutical giant. Both companies are large and well-known with good long-term growth prospects and international sales, Johnson said.
He agreed with Daigh that Hilberg should move $20,000 of her Schwab money market fund to a growth-and-income fund to increase her return and establish a core holding within her portfolio. “I like to use index funds for taxable accounts because they have low turnover, low expenses and you get market returns. For tax-deferred accounts like IRAs, I like to use growth-and-income funds.”
Johnson’s choice is Vanguard Growth & Income (five-year annual average total return, 26.2%) because the fund has been a consistent performer and has lower expenses than many similar funds. The fund’s return of 11.5% so far this year has handily beaten the Standard & Poor’s 500 index, and its five-year average return is 25% annually.
Johnson’s proposals aim to increase income while boosting overall returns by increasing the equity portion of Hilberg’s IRA from 40% to 50%, yet should reduce risk by eliminating the more volatile stocks, high-yield bond fund and international mutual funds.
Hilberg can buy and sell investments on her own through the account her husband established at Charles Schwab, which prides itself on being a low-cost, do-it-yourself brokerage. Both Johnson and Daigh told Hilberg to spread her purchase of the growth-and-income fund over four to six months. That strategy of buying in monthly installments--called “dollar-cost averaging”--lessens the risk of making one big investment at a record high. As for selling redundant holdings, Hilberg could do that in one fell swoop and temporarily park the proceeds in the money-market fund, Johnson said.
Hilberg was relieved to hear the projection that her money might last until age 90, assuming she withdraws about $10,000 a year, the IRA generates an annual return of 8% and inflation averages about 2%.
If Bonnie’s Bridal Connection were to take off, Hilberg’s position would improve. In recent weeks, she has attended civic events to promote her enterprise, joined a networking organization and decided to create a Web page. Learning her investments provide a financial cushion has given her more confidence, Hilberg said. “Things are looking up,” she said. “I just won free use of a cell phone for three months.”
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Suzy Hagstrom 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 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/home/business/finplan/make-over.htm.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Situation
* Investor: Bonnie Hilberg, 64, retiree
* Annual income: About $13,000 in Social Security. Also has a $160,000 individual retirement account.
* Problems: Insufficient income, inappropriate investment portfolio left by late husband.
* Solution: Work, and reconfigure portfolio to increase income and reduce risk.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
* Investor: Bonnie Hilberg, 64, retiree
* Gross annual income: $13,000
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Goals
Boost income by working part time and restarting her small business, Bonnie’s Bridal Connection. Better understand her late husband’s investment portfolio and reconfigure it to suit her needs.
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Current Portfolio
* Cash and savings: $1,145
* Individual retirement account: $160,000 (see table)
Recommendations
* Simplify the IRA by reducing the number of holdings, eliminate redundancies and increase the percentage devoted to equities from 40% to 50%.
* Withdraw IRA funds if needed to supplement income.
* Build cash savings to about $4,000 outside the IRA.
* Revive and promote business.
* Update will and draft powers of attorney for health-care and investment decisions.
Meet the Planners
Bonnie J. Daigh, a certified financial planner in Rancho Bernardo, works on a fee, asset management or commission basis. She is a past president of the San Diego Society of the Institute of Certified Financial Planners.
Martin S. “Duke” Johnson is a financial advisor, estate-planning lawyer and chartered life underwriter in La Jolla, where he manages portfolios on a fee-only basis.
More Income With Less Risk
Below are the changes proposed for Bonnie Hilberg’s portfolio by Martin S. “Duke” Johnson, a financial planner and money manager in La Jolla. These changes aim to make the 64-year-old investor’s $160,000 portfolio more conservative. The proposal aims to increase annual income by about $600 and reduce risk and volatility while minimizing transaction costs. All figures have been rounded and were calculated late last month.
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Ticker Annual % Amount in Annual Amount in Company or fund symbol yield portfolio income portfolio Buy Vanguard Growth & Income VQNPX 0.9% * * $25,000 Buy More Dreyfus Short-Term Income DSTIX 6.7 $19,500 $1,300 44,000 Loomis Sayles Bond LSBDX 7.7 19,600 1,500 44,000 Hold Zweig Total Return ZTR 10.0 8,400 840 8,400 Price Enterprises PRENP 9.9 1,500 150 1,500 (preferred) MCI Capital (preferred) MCICP 8.0 5,000 400 5,000 Fed. Natl. Mtg. Assn. * 6.5** 2,200 140** 2,200 bond Ford Motor F 3.6 12,900 460 12,900 Merck MRK 1.7 13,400 230 13,400 Sell Strong Short-Term STHBX 7.7 19,300 1,490 * High-Yield Bond Hotchkis & Wiley HWLDX 5.9 12,400 730 * Low-Duration Schwab Money Market * 4.3 23,000 990 2,500 Schwab Intl. Index SWINX 0.8 8,900 70 * Oppenheimer Global A OPPAX 0.8 2,300 20 * Compaq Computer CPQ 0.4 2,300 10 * Costco COST * 7,500 * * E-Digital EDIG * 300 * * Price Enterprises PREN * 200 * * Sunshine Mining SSC * 50 * *
Annual Company or fund income Buy Vanguard Growth & Income $230 Buy More Dreyfus Short-Term Income 2,950 Loomis Sayles Bond 3,390 Hold Zweig Total Return 840 Price Enterprises 150 (preferred) MCI Capital (preferred) 400 Fed. Natl. Mtg. Assn. 140 bond Ford Motor 460 Merck 230 Sell Strong Short-Term * High-Yield Bond Hotchkis & Wiley * Low-Duration Schwab Money Market 110 Schwab Intl. Index * Oppenheimer Global A * Compaq Computer * Costco * E-Digital * Price Enterprises * Sunshine Mining *
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Current
Estimated annual income
$8,330 ($690 per month)
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Proposed
Estimated annual income
$8,900 ($740 per month)
Source: La Jolla Institute for Wealth Management, Times staff
*Not applicable
**Approximate, Actual cash flow includes principal.
