She Needs a Better Fallback Plan
Jane Johnson is a professional organizer and researcher, a competent, confident, independent woman in all aspects of her life save one: money.
“I seem to have an aversion to anything involving money,” said Johnson, a 42-year-old cataloger for the UCLA Film and Television Archive who earns about $58,000 a year.
Johnson has no savings, except the $7,300 IRA she received from her former husband as part of their divorce settlement. She averages $25 a month in late charges on her bills. (“I have so many more interesting things to do than pay bills.”) And her main asset--her home in East Long Beach--seems more of a burden than a help.
She pays $1,246 a month on her mortgage, more than a third of her take-home salary, but the house has declined in value by about $20,000 since she and her ex-husband bought it for $165,000 in 1988. And because she doesn’t save, Johnson had to use her Visa card to pay her last property tax bill of $741, pushing her credit card debt up to $1,800.
“I have a pretty respectable income, but nothing to show for it,” Johnson said. “I don’t spend money frivolously. I don’t think I waste money. I just can’t tell you where it goes.”
Unlike many fortysomethings who haven’t saved for retirement, however, Johnson has an ace in the hole: She has worked for more than a decade for the University of California, which provides a confusing but substantial retirement pension for its full-time employees, regardless of how little they voluntarily save.
The UC system bases its pensions on years of service, age and salary at the time of retirement, so if Johnson stays with UCLA until she’s 65, she can expect a pension of about $3,680 a month, plus about $1,600 a month in Social Security payments when she hits 66 1/2, for an annual income of about $63,000 in today’s dollars.
Johnson could set more aside for retirement, said Sandra Field, a fee-only financial planner in Los Alamitos, but she has a pretty healthy retirement already in place. So her first priority should be building an emergency account of up to $10,000--roughly three months’ worth of her take-home salary.
“If something happens, you have nothing to fall back on but a credit card,” Field said. “I’d say the majority of working America is in your situation, with very little or no savings, so even if you got 1 1/2 months’ take-home salary, I’d be thrilled to have that cushion there.”
Field suggested an automatic saving plan that funnels money directly from Johnson’s checking account to a brokerage money market fund. “She should aim for $250 a month and scrimp and save to get at least $2,000 to $3,000 in there as soon as possible, to have some peace of mind,” Field said. “When you build it up to $4,000, you could spend $2,000 to fix things around your house. It would be too depressing to say you couldn’t touch the money until you reach $10,000, but you need to know that when you take the money out, you have to replace it. It’s a lifetime thing. You need to have a cushion of money there.”
Johnson’s dream is to live in rural areas of Southern California, such as the area around Leona Valley or De Luz, where she can pursue her passion: riding horses. But a 20-acre parcel in those areas would cost at least $200,000 with a house, and because she has no equity in her house and no savings for a down payment, that goal is years down the road, Field said.
In the meantime, Johnson has developed another passion, herding, which she shares with her boyfriend, a stock dog trainer, and her smooth collie (“Imagine Lassie with short hair”) named Osa. Johnson gets free herding lessons at an arena in Long Beach in exchange for feeding the sheep every day. And twice a month she and Osa travel to weekend herding trials.
When at out-of-town trials, she usually shares lodging with fellow herders to keep her expenses low, but the hobby still costs her about $165 a month. Other monthly expenses include $400 for food, $200 for utilities and getting her lawn mowed, $200 for gas, $72 for car insurance and $282 for the payment on her new Ford pickup.
All in all, Johnson can account for about $2,900 in regular expenses. But with take-home pay of $3,455 a month, she can’t explain where the remaining $500-plus is going every month. What’s galling, she said, is that in 1986, she and a boyfriend lived on $17,000 a year, without any real hardship, and she doesn’t feel her lifestyle has changed significantly.
“My expenses rise to meet my income. If I had $17,000, I spent $17,000 and was no worse for wear,” she said.
“Believe it or not, I have great self-discipline I can call upon whenever I have a goal in mind. The problem is I haven’t had a goal clearly in mind and definitely no path to a goal.”
Johnson’s money aversion has also kept her from delving into the mysteries of the UCLA retirement plan or choosing an investment for the IRA she received after her divorce. When she received the money last year, her father suggested she put it into a Roth IRA at a brokerage, and she dutifully obeyed. But all she did was leave it in a money market fund. “I didn’t know I had to pick a place to invest the money. I thought the Roth was the investment.”
Her horrified family, worried about her inaction in her retirement accounts, tried to explain her investment options last Christmas, but Johnson said her eyes glazed over and she just tuned them out.
“I’m usually very analytical, but I don’t understand a lot of this stuff and I don’t seem able to put a lot of energy into understanding it,” Johnson said. “I’m overwhelmed by all the options and I don’t want to do anything stupid, so I don’t do anything at all.”
Field said this is a classic reaction to information overload, and it’s typical of women.
“The biggest thing with women is this fear of making a mistake,” Field said. “I’ve seen widows sitting with over $1 million in cash, too afraid to do something because they’re afraid what they’ll do is wrong. And I tell them, ‘You need to take small steps, but you can do almost anything and get a better return than just sitting there and doing nothing.’ ”
Some people want to learn how to manage their investments, said Field, but Johnson seemed alarmed by that idea. “I hope that’s not necessary,” she said. “Just tell me where to put my money, and I’ll do it, OK?”
So how do people such as Johnson protect their investments? At a minimum, Field said, they must learn to read their quarterly statements, to make sure they aren’t losing big chunks of money. And once a year, they should pay an independent financial advisor to look over their financial situation and recommend any needed changes.
“They’ll probably pay an hourly fee of $100 to $200 to a certified financial planner or certified public accountant,” Field said. “But that’s a small price to pay on an annual basis to get objective advice and make sure you’re not screwing up.”
Field said Johnson might have been able to avoid some unfortunate decisions had she sought professional advice last year. For example, Johnson refinanced her mortgage to go from a 30-year to a 15-year loan, which increased her mortgage payments by $100 a month. Johnson said by refinancing to a 15-year loan, she figures she saved herself $100,000 in interest.
Although that’s true, Field said, Johnson has very little wiggle room now to cover her monthly expenses. By taking a longer loan, she could have freed up more money for short-term and retirement savings. Most planners argue that having such a cushion takes priority over paying the mortgage off early. When Johnson refinanced, she took the equity out of her home, $10,000, and used it as a down payment for a new, $22,000 Ford pickup after she drove her 1987 Mazda pickup into the ground.
Field said she would have advised Johnson to purchase a late-model used pickup and use the $10,000 to set up an emergency fund. At this point, it isn’t worth changing the mortgage or selling the car. But there’s still time for Johnson to undo her decision to convert her IRA to a Roth IRA.
Roth IRAs are funded with after-tax money, which means the $7,300 must be counted as income on her 1999 taxes, something Johnson didn’t know. That extra income would leave her with an unanticipated tax bill of $2,800--money she doesn’t have.
Roth IRAs are attractive because investors don’t have to pay income tax on the money when it’s withdrawn at retirement. Johnson might want to save in a Roth IRA in the future, but Field said she can’t afford the taxes on a conversion right now.
Field also suggests that Johnson start paying her bills electronically to make that process easier.
Finally, Field said, Johnson needs to take advantage of the benefits that are offered at UCLA. For just $27.05 a month, she can purchase disability insurance that will pay her $3,382 a month if she can’t work. “That’s a tremendous benefit,” Field said. “If you had to buy that in the private sector, it would probably cost you $100 a month.”
Another plus is that UC employees are required to contribute 2% of their monthly salary, minus $19, to a tax-deferred defined contribution plan, or DCP, also known as a 401(a). The program is mandatory, but unlike the pension plan, employees can direct the way their DCP funds are invested.
And UC employees who want to put aside even more money for retirement can have additional money--up to $10,500 a year or 25% of their adjusted gross income, whichever is less--into a tax-deferred 403(b) plan.
Field said Johnson’s DCP money, which has been sitting in a low-interest savings fund, should instead be in one of the stock mutual fund choices offered, either one of several UC-managed funds, the Calvert Social Investment Fund Balanced Portfolio or more than 100 Fidelity funds. Johnson can choose to contribute to only two Fidelity funds in the DCP plan, but once the money is in Fidelity she can move it to other funds in that family. Once her other savings are on track, Field said, Johnson can start building up her savings for a horse property. Or, if she puts that off until retirement, it would make sense to bump up her tax-deferred contributions by putting an additional 1% or 2% of her salary into the 403(b) plan.
“Really, the picture does not look that bad when you’re actually in retirement,” Field said. “Your job is to build up your taxable savings and keep your body together so you can still ride horses when you’re 60 and 70.”
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This Week’s Make-Over
* Investor: Jane Johnson, 42, film cataloger
* Income: $58,000
* Goals: Get financial life in order, build some savings
* Assets: $7,300 in a Roth IRA; a house in East Long Beach with minimal equity; a generous pension and other retirement benefits are expected from employer.
Recommendations
* Build $10,000 emergency fund with automatic savings.
* Convert Roth IRA back to traditional IRA.
* Pay bills electronically, use impound account for property taxes.
* Sign up for extra disability coverage through employer.
* Invest IRA and employer 401(a) savings plan in equities.
Meet the Planner
Sandra Field is a fee-only planner at Asset Planning Inc. in Los Alamitos.
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Jeanette Marantos 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.
