Air Traffic Controller Charts Retirement Course
Gary Schoelen guides planes through the skies of the Western United States, but he needs help setting a financial flight path for himself.
Schoelen, a 43-year-old air traffic controller, is attempting to chart a course toward a comfortable and early retirement because Federal Aviation Administration rules require that he conclude his career at age 56.
“I need to do the right things with my money during the next few years because once I retire from this job, I don’t plan to start another,” Schoelen said after completing a shift at the Los Angeles Air Traffic Control Center in Palmdale.
Schoelen, who earns about $100,000 annually, needed advice in several areas.
First, he wanted to know whether he was saving enough for retirement and whether he has invested his retirement money properly. He has set aside $62,000 in retirement accounts, all invested in equities. In addition, he expects to receive an FAA pension worth about 62% of his pay each year, according to a formula based on years of service.
Schoelen also has $35,000 in non-retirement savings that he’s tempted to spend on a recreational vehicle. And he needs advice about whether it is wise to sell his home to reduce the length of his commute. He lives in a gated community in Tehachapi, which is more than 70 miles north of his job in Palmdale--a three-hour round-trip commute.
“After eight hours in front of a radar screen and three hours on the road, I feel pretty spent,” he said.
While Schoelen has some major decisions to make, he’s in good position to retire comfortably, said Salvatore Iannotti, a Glendale-based financial planner who reviewed Schoelen’s finances. Schoelen’s generous Civil Service pension will cover most of his retirement needs, and he can eventually tap his retirement savings to boost his retirement income to about 80% of his current salary. Given how much Schoelen spends, that should be plenty.”
“Gary is doing well with his finances,” Iannotti said. “It’s good that he’s thinking about retirement while he still has some time to make important financial preparations.”
The key issue Schoelen needs to consider is that his mandatory retirement age of 56 arrives before the time he can tap his retirement accounts without facing penalties or strict pay-out formulas.
Removing money from these accounts before age 59 1/2 carries early withdrawal penalties unless Schoelen agrees to take equal monthly payments based on his expected life span.
When people have other options, Iannotti typically counsels against the early withdrawal approach. Equal payments reduce the flexibility offered after 59 1/2. In addition, by withdrawing money early, Schoelen would have less time to take advantage of the tax-deferred compounding that makes retirement plans so advantageous.
A better idea is for Schoelen to construct a 3 1/2-year financial “bridge” that will get him to 59 1/2 without dipping into his retirement savings, the planner said.
To determine how to build that bridge, Iannotti had Schoelen complete a monthly expense report covering everything from his mortgage, taxes and groceries to vacations, vehicle maintenance and clothing. The exercise revealed that Schoelen typically has about $1,600 of his $8,300 gross monthly salary left for discretionary spending, even after he contributes to his IRAs and Thrift Savings Plan, a government retirement savings program that works much like a 401(k).
Some of this surplus makes its way into Schoelen’s taxable savings account. Some goes to hobbies, such as parts for a $15,000 experimental aircraft he owns.
If Schoelen can set aside an additional $570 per month in a stock mutual fund, he has a good chance of solving his retirement bridge dilemma, Iannotti said. The money could be split between a market index fund, such as the Vanguard 500 fund (five-year average annual return: 23.8%), and a blue chip growth-stock fund, such as Vanguard U.S. Growth (five-year average annual return: 26.2%).
Even if the stock market’s average annual return over the next 13 years shrinks to the 12% range from the 20%-plus returns of the last five years, that money could grow to about $180,000 by the time Schoelen reaches 56.
Schoelen didn’t blink when presented with the $570 monthly savings goal. In fact, he might soon be able to contribute even more. His salary is likely to increase in the next year, and some expenses, such as the $475 he pays in monthly child support for his son, end next year.
Iannotti encouraged Schoelen to save what he can beyond the $570 without making the effort too onerous.
“You can’t expect to save all your discretionary income,” Iannotti warned. “You don’t want to make savings such a grind that you’re afraid to go out and buy a pair of shoes.”
While the savings strategy should cover the retirement shortfall, Schoelen’s current $35,000 savings account can serve as an emergency fund, Iannotti said. If Schoelen has no big financial crises in the next dozen years, it can also be part of his retirement funding, providing extra income just in case the mutual funds don’t perform as well as projected or Schoelen fails to meet the $570 savings target.
Consequently, Iannotti discouraged the RV purchase Schoelen was pondering.
Instead, he suggested that Schoelen rent an RV for vacations and consider buying one at retirement when he will use it more frequently. Renting an RV for $750 to $1,000 per week a couple of times a year makes more sense than paying $40,000 to $50,000 to buy one and face the insurance and maintenance costs that go along with it.
“I kind of figured you might say that,” Schoelen told Iannotti.
Since there’s no telling when emergency money might be needed, Iannotti suggested that it be invested in a money market fund, which pays modest interest but poses little risk to principal.
Schoelen’s retirement funds should remain in equities, Iannotti said. Schoelen has a $6,000 Roth IRA invested in Janus 20 (five-year average annual return 37.4%) and $56,000 in his Thrift Savings Plan in a fund that matches the performance of the S&P; 500. Schoelen had wondered whether some money should be funneled into more conservative bond funds with retirement just 12 years off, but Iannotti said no.
“You don’t just want to be thinking about age 56,” Iannotti reminded him. “You’ll probably live to 85, so you will want some growth. Your time horizon is actually longer than you think.”
As for Schoelen’s housing situation, the ultimate decision is not solely about finances. Schoelen needs a compromise because he loves his community but hates his commute.
His house is situated on one acre and is part of a community that has a golf course, tennis courts, an equestrian center and a lake. Yet he almost sold his home recently for $120,000, backing out only at the thought of moving to the more densely populated environs of Palmdale.
“I was looking for a nice rural area when I bought my home for $97,000 10 years ago,” Schoelen said. “I concluded that my problem was not where I live but where I work.”
With no air traffic control jobs nearer than Palmdale, Schoelen is thinking once again of putting his house on the market. But Iannotti encouraged him to consider renting a home in Palmdale while finding tenants for his Tehachapi house instead.
This would save the expense of selling his home and would allow Schoelen to easily reverse his decision if he didn’t like Palmdale. Rent received on the Tehachapi house would nearly cover the cost of Schoelen’s mortgage and taxes. In addition, the Tehachapi house would be virtually paid off when Schoelen retires.
Schoelen doesn’t cherish the idea of becoming a landlord but also doesn’t want to unload a home he loves.
All things considered, the scenario Iannotti laid out encouraged Schoelen about his future.
“I can see myself in a dozen years with a house that is just about paid off and some nice investments,” he said. “Maybe by then I’ll also have an RV in the driveway and some road maps in my hand.”
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Graham Witherall 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, 202 W. 1st St., Los Angeles, CA 90012, or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.
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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.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
* Investor: Gary Schoelen, 43, air traffic controller
* Income: $99,600
* Goal: Plan for retirement and get advice about moving and making a major purchase.
Current Portfolio
* $56,000 in a Thrift Savings Plan in fund matching S&P; 500
* $6,000 in Roth IRA, invested in Janus 20
* $35,000 in cash
* Home worth roughly $120,000
Debt
* $76,000 mortgage loan
Recommendations
* Begin $570 monthly mutual fund investments to create enough savings to provide retirement income between age 56 and 59 1/2, when retirement savings accounts can be easily tapped.
* Put $35,000 cash into money market as an emergency fund
* Defer purchase of a recreational vehicle
* Shelve plans to sell residence. Consider renting it out, and renting a house or apartment closer to work.
Recommended Investments
* Vanguard 500 Index, (800) 662-7447
* Vanguard U.S. Growth, (800) 662-7447
About the Planner
Salvatore Iannotti is a Glendale-based personal financial planner and registered investment advisor associate with Financial Network Investment Corp. He specializes in retirement and estate planning and teaches courses in investments, insurance and real estate at UCLA Extension.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Situation
* Investor: Gary Schoelen, 43, air traffic controller
* Annual Income: $99,600
* Problem: Wants to save enough and invest efficiently to be able to retire by 56-a Federal Aviation Administration requirement.
Possible solutions: Build enough capital to bridge the gap between retirement at 56 and early withdrawal penalities levied before age 59 1/2 on most retirement accounts.
