Retired Simi Valley Couple Can Afford to Live Out Their Dreams

Like many retired couples, Fred and Norma Hall, both 68, fear that their golden years will outlast their gold. Their concerns have less to do with money than with longevity.

“My mother lived to be 90,” Fred said. “I’ve got an aunt that’s 98 and all of her sisters--five of them--lived well into their late 80s. My grandfather lived to be 90.”

Norma’s parents also lived into their 90s. One of her sisters died at age 72, but not because of illness. She was killed in an accident.

Planning for what could be a very long retirement has the Halls nervous about spending their savings. But they have less to worry about than they think, said Elaine E. Bedel, a fee-only financial planner with Bedel Financial Consulting in Indianapolis.

The main issue for the Simi Valley couple is not a lack of money but rather an unwillingness to part with it, Bedel said. They have done a good job of accumulating assets, but that phase of their life has ended. Now it’s time for the couple to enjoy themselves.

While they can’t toss the budget completely, the Halls could spend an additional $600 to $750 a month without depleting their bank accounts for 27 more years.

“Given their lifestyle, they’re fine,” the planner said.

A spend-down plan that takes their assets to zero over their anticipated life spans is workable because they are not planning to leave an inheritance for their three grown children, ages 39, 40 and 43.

“It’s a philosophical thing,” Fred said. “I think they can take care of themselves. We’re not going to deny ourselves.”

Some background:

* The Halls have no debt.

* The mortgage on their house, which is worth about $180,000, was paid off about 10 years ago.

* Their annual income from pensions and Social Security--Fred was a collector for the Franchise Tax Board, Norma a nurse--is about $52,000.

* They’re able to meet their living expenses on their after-tax income of about $4,000 a month.

* Their retirement accounts are worth $153,500, and they have an additional $150,000 in other savings, mostly because Norma inherited $100,000 from her sister, who died in 1992.

* The couple already have a will that’s more than adequate for their traditional family and simple desires.

* Fred has a long-term-care insurance policy. However, Norma might have trouble getting one because she has diabetes, Bedel noted.

* Finally, although neither owns a life insurance policy, both of their pensions are based on joint-survivor options, ensuring that the survivor would continue to receive the same income they’re living on now.

Norma said she would like to see more of the United States, but she and her husband are reluctant to dip into their savings out of fear that the money won’t last long enough.

That’s a common concern among older couples, Bedel said.

“Many people look at their retirement sources and say, ‘I’m just going to take my income from these sources and then I’ll have the money forever,’ ” she said. “But you don’t have to worry about spending the principal if you stay within guidelines.”

To determine just how much the Halls will need in the future, Bedel figures for a 3% average inflation rate. That anticipates that the Halls’ expenses will rise by that rate, compounded annually, for as long as they live. She then calculates how much their investments will earn in the meantime, using some conservative estimates of average returns for the type of assets they own. Because the Halls have an exceptionally conservative portfolio, Bedel’s calculations are based on the Halls earning either 5% on average or 6% on average on their liquid investments--everything except the equity in their home.

Given those assumptions, they are spending considerably less than they can afford. If they earn 5% on their money, they could spend an additional $600 per month, or $7,200 per year, without running out of money until age 95. If they earn 6%, which is roughly what a short-term certificate of deposit currently pays, they could spend an additional $750 per month, or $9,000 per year, she said.

Some Risk Could Do Them Good

They may have an even better outcome if they take on just a touch of risk.

At the moment, almost all of their assets are in fixed-income investments. Fred recently invested $5,000 in an online stock-trading account, at the urging of his son, using “the dartboard method,” but everything else is in low-risk, low-yield vehicles such as certificates of deposit, U.S. savings bonds, regular savings accounts and money market mutual funds.

“I’m very conservative,” Fred said. “I’m afraid I’m from the old school, and I’m sticking my money into stuff that’s maybe not even going to keep up with inflation.”

The Halls could become a little more aggressive by investing in the stock market, which would probably boost their average annual returns a bit. But taking on additional risk isn’t necessary if it makes them uneasy, Bedel said.

“Could you be a little more risky?” she asked the couple. “The answer is kind of yes and no, depending on how comfortable you are with risk. Our rule of thumb is, if your money can stay in the stock market for five years, then that’s an appropriate place for it. If it can’t, then it shouldn’t be there.”

She suggested that the Halls put 20% of their investment assets, or about $60,000, into a diversified portfolio of stock mutual funds.

“But if it’s going to cause you to lose one wink of sleep, it’s not worth it,” the planner said.

After all, even a 5% return will meet their needs, and it’s important to remember that one’s investments are supposed to provide both physical and emotional comfort. If your investments are making you nervous, you’re investing inappropriately.

Having established that, Bedel said the next step for the Halls is to determine a priority of spending, finding the most tax-efficient way to tap their assets.

Money Is Available to Spend More Now

First, they should begin spending the $85,000 they have sitting in certificates of deposit, which earns income that is already subject to taxes. Using these funds will not create additional tax, she said.

Their two other taxable investment accounts should be liquidated next because the profits on these investments will be taxed at preferential capital gains rates.

The Halls also might want to change their Series E and EE U.S. Savings Bonds to Series HH bonds, which pay regular interest.

At age 70 1/2, the Halls will be required to take a minimum distribution from their individual retirement and deferred-compensation accounts, but they should leave them alone until then, Bedel said.

If the Halls spend an additional $600 a month from their CDs, they will drain less than $12,000 from their portfolio before they are required to start taking minimum distributions from their retirement accounts in 2002.

At that point, the retirement accounts could be used to meet the additional spending needs, she said.

If the minimum distributions provide more than what the Halls need each month, the money should be reinvested in taxable savings accounts to give them an additional cushion. Meanwhile, if they hit their mid-90s and find themselves running short of cash, the equity in their house can serve as a safety net that can be tapped last.

“It sounds pretty good to me,” Fred said of the plan. “It extends a long way, well into our 90s, and makes me feel a lot better.”

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, 202 W. 1st St., Los Angeles, CA 90012, or money@latimes.com.

You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform. Recent columns are available at https://www.latimes.com/makeover.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investors: Fred and Norma Hall, both 68

* Gross annual income: $52,000

* Goals: Determine whether they can spend more, possibly to travel, without jeopardizing their retirement security

Current Portfolio

* $35,500 in IRA invested in credit union savings account

* $118,000 in deferred compensation account

* $85,000 in certificates of deposit

* $20,000 in U.S. Savings Bonds

* $5,000 in E-Trade account

* $40,000 in Eaton Vance Prime Reserves

Recommendations

* Live a little. Spend an additional $600 to $750 a month.

* Determine a priority of spending, finding the most tax-efficient way to tap assets.

* If willing to take a risk, invest about 20% of portfolio into a diversified group of mutual funds.

Meet the Planner

Elaine E. Bedel is president and owner of Bedel Financial Consulting Inc., a financial planning and investment management firm in Indianapolis. She has been consistently ranked as one of the nation’s top financial advisors by Worth magazine.