When Other Goals Get in the Way of the Final One: Retirement
Lolita Reynoso doesn’t want to end up like her father, or any number of other relatives who spent most of their lives not knowing if they could afford to retire.
Her passion for security led Reynoso to a government job. Later, when she became an independent consultant, she was careful to buy herself a complete benefits package and contribute regularly to individual retirement accounts.
She’s also hoping to save to buy a house to replace her condo and wants that home paid off well before retirement.
But Reynoso also has made financial decisions that take her farther from retirement goals. She bought expensive life insurance rather than saving more, and her desire to have a paid-off home may actually delay her retirement. She also has a passion for old German cars; she already owns 1974 and 1989 BMWs and wants to save $20,000 for another car.
At 38, her net worth is more than $130,000, with more than half of that in retirement accounts. Will it be enough?
As long as she is aggressive with her investments, yes, said Preston Caves, a fee-only certified financial planner who heads Caves & Associates in Manhattan Beach. “She needs to exchange some of her low-risk, low-return investments for growth-oriented investments, such as stock mutual funds.”
Caves suggested she rearrange priorities to save more in tax-deductible retirement accounts invested in stock funds. But Reynoso isn’t sure she wants to change her accounts or plans, even for a larger retirement nest egg.
Family’s History Had Great Impact
Reynoso’s ideas about money are deeply influenced by her family’s experiences. Her father, Jose, worked three jobs for 30 years without complaint to support his family in San Gabriel.
His parents, like his wife’s, had emigrated from poverty in Mexico as children. To supplement the family income, Jose joined his father, other relatives and neighbors working for a felt factory when he was just 16. Later, supporting his own family, he worked as a gardener on weekends and cleaned offices at night, determined that his four children would go to college.
When Jose Reynoso turned 50, the felt factory shut down and he was left with a pension of just $100 a month. So he took a job as a deliveryman at Vons and worked there for 15 years.
Meanwhile, when the couple’s oldest son went to college, Lolita’s mother went as well. She received two master’s degrees in education and became a first-grade teacher. Between her income and Jose’s pension from Vons, he was able to retire 18 months ago.
Security Sacrificed for Job Satisfaction
Lolita Reynoso started on a safe path. After she graduated from State University of New York at Albany with a master’s degree in social work, she worked for the government as an adoption caseworker for the Los Angeles County Department of Children and Family Services, counseling couples who were adopting foster kids.
“It was extremely challenging because I was working with children who were difficult to place--real blood, sweat and tears work--but extremely rewarding,” Reynoso said. She was so good at it that she was promoted to supervisor, then to deputy regional administrator. Supervising the supervisors, she was two steps removed from the work she had found so satisfying.
Then she focused on the lesson her mother learned later in life: Do the work you love. Sacrificing the security of her county job, Reynoso went out on her own as a private adoption service provider. She works out of her home counseling birth mothers in open adoption cases.
The financial consequences: No more government pension. No retirement plan, no health insurance, no liability insurance for her practice.
Reynoso had quit just short of the 10 years necessary to keep her money in the county pension fund, so she was forced to withdraw her $30,000 share and roll it over into an IRA to invest herself.
Reynoso tried to replicate the elements of her previous benefits package. She bought health and dental insurance from Kaiser Permanente, professional liability and disability insurance through the National Assn. of Social Workers and a $100,000 whole-life policy. She put her IRA in three Sun America funds with varying levels of risk and bought two annuities worth a total of $15,000.
Helping her meet expenses, a roommate pays $400 per month toward the $1,225 mortgage payment on Reynoso’s condo in Inglewood. Dreaming of a house that she can live in for the rest of her life, Reynoso took a second, part-time job for $1,000 a month as a medical social worker and is directing those earnings into a money market account for a down payment. So far, that fund has $14,000.
Caves recommended that Reynoso use the next two years--the period before she expects to sell her condo and buy a house--to funnel as much cash as possible into a savings incentive match plan for employees (SIMPLE-IRA).
The reason? Reynoso is limited to $2,000 in contributions per year with a regular IRA, whereas a SIMPLE will allow her to contribute significantly more--up to $6,000. Another IRA for the self-employed, the simplified employee pension-IRA (or SEP-IRA), would allow higher savings if her business income grows.
For convenience, Caves said, Reynoso could combine her existing $7,000 SEP-IRA with her regular $40,000 IRA. But a SIMPLE-IRA must be kept separate.
Moreover, Caves said she should take the money out of the high-fee, average-performing Sun America funds and put them into no-load funds.
But Reynoso is reluctant to sell those funds because of the surrender charges she’ll have to pay, although Caves assured her that the savings in fees would cover the loss within a couple of years. “I’m satisfied with the funds’ performance, so I’m comfortable keeping my money in them until I’ve reached the point where the surrender fees are minimal,” Reynoso said.
Life Insurance Can Carry Disadvantages
Caves also questioned Reynoso’s investments in life insurance--both the $100,000 policy and the annuities, which provide relatively small yields in exchange for added security and tax deferral on the income.
Caves felt such investments may not make sense for a single woman who expects to have no children. “I have life insurance so that if I die before retirement, my nieces and nephews will have college money,” Reynoso explained.
“Your estate is worth $130,000 already,” Caves said. “Isn’t that enough for college?” But Reynoso felt that if she died young, her estate would be spread too thin to satisfy the needs of her large extended family.
Caves understood Reynoso’s aims but wanted to make sure she knew the disadvantages of what she was doing. “Just understand that there’s a cost of life insurance--less money for your own retirement. You’re sacrificing your own future financial security a bit in order to leave money to your family, even though they’re not dependent on you,” Caves said.
The alternative? “You could save more for retirement and have a bigger estate to leave your family if you die in old age.”
Reynoso plans to put 10% down on a home and make large monthly payments with a 15-year mortgage, which would cut her annual retirement contributions dramatically.
Caves suggested that she consider putting 20% down with a 30-year mortgage to minimize her monthly payments.
A lower mortgage payment would be easier to swing in the event of a drop in business, sickness or disability. But Reynoso resisted that idea because she wants her house paid off when she’s in her 50s and, in the short term, she wanted to free some money to invest in the stock market.
“I understand that it’s very comforting to have your house paid off,” Caves said. “It would be great to have a 15-year mortgage--if she can swing it.”
For Reynoso that means relying on everything going perfectly from here on in, continuing to have a roommate, staying in perfect health and working steadily from today until retirement--not a foolproof scenario.
Why resist tactics that would increase the odds that Reynoso achieve her goal of a comfy retirement? Said Caves: “Financially, people tend to make decisions on more of a short-term horizon and they don’t always make them based on what’s good for them in the long run. The emotional . . . factors behind decisions can be more important to them than the financial reasons.”
Such trade-offs can be acceptable--as long as the person making the decision understands them.
Stephanie Losee 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/makeoverform.
Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.
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This Week’s Make-Over
* Investor: Lolita Reynoso, 38, private adoption consultant
* Gross annual income: About $60,000, which includes a second job that brings in $12,000 annually plus rental income of $4,800
* Goals: Buy a house in two years; save for retirement
* Current portfolio: About $131,400, including:
Cash: $14,300 in money market account
IRA: $40,300 in three load funds from Sun America
SEP-IRA: $6,900
Annuities: $15,800 in two policies
Equity in condominium: $50,000
Recommendations
* Maximize retirement contributions. Suggested funds: T. Rowe Price Mid-Cap Growth, Manager’s International Equity, Manager’s Special Equity, T. Rowe Price Spectrum, Acorn International and Cohen & Steers Realty.
* Cancel life insurance policies.
* Plan future mortgage payment carefully to reduce risk of cash squeeze from unanticipated events.
Meet the Planner
Preston Caves is a fee-only certified financial planner and founder of Caves & Associates, a financial advisory firm in Manhattan Beach. He has an undergraduate degree and a master’s in business administration from Stanford University.
IRA TIPS
A primer, and some investment ideas for your account. C6
