Retired Schoolteacher’s Finances Are a Study in Risk Aversion
Nina Cross Brazelton still thinks of herself as a “poor, struggling” retired schoolteacher--even though she is a millionaire.
This misperception costs Brazelton in terms of both time and money. Despite a net worth of $1.5 million and annual income that exceeds $80,000, the 74-year-old Santa Ana resident is so worried about running out of cash that she returned to work to save more.
Skeptical of high-priced experts, she gets her taxes done by H&R; Block--and ends up paying penalties year after year.
Experts recruited to review her finances for The Times say that her investment portfolio is so conservative that she actually loses ground to inflation and income taxes with every dollar she saves.
Worse yet, her living trust--which wasn’t cheap--may not be valid.
“Nina’s approach as a do-it-yourselfer is like taking a Mercedes to the Yugo dealership for repairs,” said Gregory Aitkens, a certified financial planner and one of three experts consulted to review Brazelton’s financial situation.
“She is very fee-adverse, but in the long run, good professionals would save her a lot of money,” Aitkens said.
Yet despite asking for ideas that would help her lower her income taxes and increase--or at least preserve--her estate for her four children, she seems unlikely to follow them: When she heard what The Times’ planners had to say, she wasn’t thrilled with the suggestions.
The advantage she has is that, with her high net worth and income, Brazelton isn’t in a position where she must make any changes.
A lifelong saver, Brazelton said she regrets not being more flexible. If she could repeat her experience with investing, she said, she would have diversified her portfolio with some growth stocks.
Instead, she plunked most of her savings into bank savings certificates--what Aitkens calls “certificates of depletion.” After inflation and taxes, Brazelton’s rate of return is near or below zero, he said.
But when Aitkens suggested she buy stocks, Brazelton balked.
“If you’re really wealthy, you can invest in stocks,” Brazelton declared. “I worked three jobs to get what I have.”
Brazelton remembers hearing, while growing up during the Great Depression, adult conversations about hard times. But she says her aversion to risk is more practical.
Besides teaching political science at Bolsa Grande High School during the 1970s and ‘80s, Brazelton worked evenings as a consultant in J.C. Penney’s home-decorating department and weekends as a real estate agent.
She started substitute teaching two years ago when Congress authorized the Roth IRA. The idea that she could save and eventually withdraw both principal and investment earnings tax-free was just too good to pass up--even if she had to go back to work. She doesn’t want to risk losing any of that hard-earned money.
Aitkens tried another approach. Brazelton wants a better return but no investment risk, and she wants to pay less in income taxes. How about a variable annuity? he suggested.
The principal value of the annuity is insured; the invested portion goes into a broad basket of stocks that could generate higher returns; and, until the money is tapped, Aitkens pointed out, it grows tax-free.
“I have too many annuities,” Brazelton responded--though her annuities are the fixed-rate variety.
Other alternatives that could be used to diversify her portfolio at higher rates of return include tax-exempt municipal bonds (she owns a small amount of muni bond funds currently), and tax-managed accounts or mutual funds that seek to minimize annual taxes and maximize long-term capital appreciation.
But when some of Brazelton’s 21 CDs recently matured, she rolled them into new CDs paying 7%.
Brazelton also owns real estate, including a $350,000 ranch in Riverside County that requires upkeep and tax payments but produces no income.
Kirk Reidinger, a certified public accountant, suggested that Brazelton trade her ranch for income-producing property under so-called federal-1031 tax rules that allow the exchange of like properties without paying income or capital gains taxes on the swap. With her equity in the ranch, Brazelton could buy apartments that generate steady rental income.
But Brazelton dismissed the idea of becoming a landlord. “Too much stress for a senior citizen,” she said.
Brazelton’s pet peeve is federal regulations requiring people at age 70 1/2 to begin taking distributions from their retirement plans, which has pushed part of her income into the 31% tax bracket.
“The government seems to be punishing us for saving too much for retirement by forcing us to withdraw it and then make us pay higher taxes,” she groused. “I’m paying $23,000 a year to Uncle Sam and the state, and I’m just a little retired teacher.”
Aitkens recommended that Brazelton slash her income, and ultimately her taxes, by taking smaller mandatory distributions. Federal rules allow retirees to use the joint life expectancy of themselves and their oldest child to calculate a monthly payment that is less than the amount based solely on their own life expectancy. Brazelton could cut her distributions by $8,000 a year that way, Aitkens estimated.
But Brazelton spends a lot of that money on cruises and other travel, a luxury she can certainly afford. She enjoys celebrating each New Year’s in a different country. On one favorite trip, she attended the Kaiser Ball in Vienna, where she indulged in her hobby of ballroom dancing.
“I would like to enjoy what I have more, but when you work hard for something, it’s hard to let go of it,” she said. “I don’t want people to think I’m stingy when it comes to paying taxes. I just don’t want to pay more than my fair share.”
Brazelton also should think about setting up trusts to hold ownership to her ranch and a $175,000 beach property she owns in Ventura County. In fact, Brazelton has two trusts, but one was never signed and is thus invalid, said Greg Beck, an estate planning lawyer in Laguna Hills.
That revelation horrified Brazelton: “I paid $2,000 for that [trust], and I got it from a top law firm,” she said.
Meanwhile, Reidinger noticed that Brazelton pays about $260 a year in penalties for underpaying her income taxes. She needs to start making estimated payments during the year, and probably needs more tax advice than she’s getting in her annual visits to H&R; Block, the experts agreed.
Will Brazelton follow any of this advice?
She says only: “It’s a lot to think about.”
*
Suzy Hagstrom is a regular contributor to The Times. She can be reached at haggie007@hotmail.com. 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.
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The Situation
Investor
Nina Cross Brazelton, 74, retired schoolteacher
Annual income
About $87,000
Problem
Wants to boost investment returns and cut taxes.
Possible solutions
Shift portfolio to take more risk and boost holdings in tax-managed investments. Rethink estate plan.
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This Week’s Make-Over
Investor: Nina Cross Brazelton, 74, retired schoolteacher
Gross annual income: About $87,000
Goals: Increase return on investments, reduce taxes, learn whether tax-sheltered annuities and fixed annuities can be reinvested, reduce future estate taxes for family, decrease mandatory distributions from retirement accounts.
Current Portfolio
Cash and short-term savings accounts: About $11,000
Real estate: $289,000 home; $350,000 ranch in Riverside County; $175,000 beach cottage in Ventura County
Retirement accounts: $6,000 in two Roth IRAs invested in certificates of deposit; $35,000 in traditional IRA invested in CDs; $14,534 in tax-sheltered annuity from Garden Grove School District, invested in “total return” mutual fund of stocks and bonds; $68,000 in deferred-compensation plan from the teachers’ credit union
Other investments: $206,000 in 21 CDs; $171,000 in credit union share accounts; $175,000 in five fixed annuities; $14,000 in two municipal bond mutual funds
Debt: $15,000 remaining on home mortgage at 9% interest
Recommendations
Reinvest some CD money into variable annuities to reduce taxes, get higher returns and protect principal.
Reinvest some CD money into tax-managed accounts designed to reduce taxes and/or in additional tax-exempt municipal bonds.
Convert the five fixed annuities to variable annuities if the rules allow it and no financial penalties result.
Reduce mandatory distributions from retirement plans by using a formula that includes life expectancy of oldest child.
Pay estimated taxes on time each quarter to reduce or eliminate financial penalties for underpayment.
Pay fourth-quarter state income taxes before Dec. 31 to get a deduction on federal taxes for 2000.
Draft a new living trust to avoid estate going through probate court.
Update other estate-planning documents, such as wills and powers of attorney.
To eliminate or reduce estate taxes paid by heirs, put ranch and beach cottage in a family limited partnership or limited liability corporation, put home in a qualified personal residence trust.
Devise a lifetime gift strategy to transfer wealth to children and grandchildren.
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Meet the Planners
* Gregory Aitkens is a certified financial planner in Santa Ana who is compensated by fees or commissions, depending on clients’ needs. Aitkens is affiliated with Lincoln Financial Advisors Corp., which chose him as its 1999 Financial Planner of the Year in Orange County. He is president of Christians in Commerce’s Saddleback Valley Chapter and serves on the organization’s national board.
* Kirk T. Reidinger is a tax partner of Stephens, Reidinger & Beller in Irvine. He is an active member of the American Institute of Certified Public Accountants and the California Society of CPAs.
* Greg Beck is an estate-planning lawyer in Laguna Hills. He is a partner of Beck & Christian, a firm he started in 1983.
