Widow's Cautious Savings Style Needs Only a Little Fine-Tuning

By JEANETTE MARANTOS

March 21, 2000 12 AM PT

SPECIAL TO THE TIMES

After years of scraping by, Joan Shampoe is in the strange position of being a childless widow with plenty of money and no heart to enjoy it.

Shampoe, 67, tended to her widowed father for seven years and then, after retiring, spent 10 years nursing her husband Robert through debilitating back surgeries, small strokes and, finally, Alzheimer’s. Toward the end, she set up a bed in their living room so he could easily look outside and she could always be near him. She was by his side, alone, when he died in their Ventura home Nov. 22, 1998.

Now Shampoe wonders who will care for her in her old age. She’s also concerned about making her money last. But her ability to make decisions about her life and her finances are still clouded by grief from losing her husband of 43 years.

“I just don’t understand how anybody gets over a death. I had a doctor who told me, ‘You get only six months [to grieve] and anything over six months is clinical depression.’ I told him, ‘Apparently you never loved anybody.’ ”

Fortunately, Shampoe is in good shape financially except for some small, ill-advised investments in annuities, said Robert Wacker, a San Luis Obispo financial planner who reviewed the widow’s situation for The Times. He assuaged her fears that some of her moves, such as paying off her mortgage early, were “crazy.”

“You’re a good saver, and you avoided some big missteps a lot of other people don’t,” Wacker said. “What you’ve done is conservative, not crazy.”

Wacker believes there are relatively safe ways for Shampoe to get higher returns on at least part of her money, but he also thinks she needs to give herself some slack.

“The loss of a long-term spouse is not an easy thing to get over,” he said. “It’s taken five years for my mom, if she’s over it now.”

After her husband’s death, Shampoe began sorting through the myriad savings bonds, individual retirement accounts and certificates of deposit they had started over the years and was stunned to discover she had about $340,000. About $90,000 of that came from her husband’s insurance, but the rest she attributes to compulsive saving.

“My middle name must be squirrel,” she said. “I didn’t know what I was doing. I was just trying to hold on to money, and if you put it where you can’t find it or see it, you don’t spend it.”

She socked money away in the 1980s, too, when she realized she would have to retire early to care for her increasingly disabled husband. She began doubling up her mortgage payments and paid off their 30-year loan 10 years early.

“I know some people would say, ‘You should have invested that money instead of paying off your house,’ but there’s something about knowing your house is paid for. It’s the best feeling in the world,” she said.

Shampoe receives $1,613 a month from three pensions and Social Security, but she lives on about $1,000 a month and saves the rest for big expenses, such as her $2,000-a-year long-term care insurance premium and the trip she took to Pennsylvania last year to visit an old friend and her closest relative--her husband’s 53-year-old niece.

Shampoe says she has tried to convince the niece to move in with her in exchange for an inheritance. Shampoe says she has no one else to care for her.

“I have neighbors who will pull a trash barrel for me, but there’s nobody around who wants to change your Pampers,” she said. “I know she would never put me in a nursing home.”

It would be good if an arrangement with her niece works out, Wacker said, but Shampoe shouldn’t count on it. She should continue paying her long-term care premiums. “It could be that you’ll end up relying on the kindness of strangers--strangers you’ll have to pay.”

Shampoe’s most immediate challenge financially is to increase the returns on at least part of her savings, Wacker said, while minimizing taxes.

Her taxes have been low for years, but Shampoe got a nasty shock from a $3,000 IRS tax bill this year, largely because she cashed in $20,000 of her savings bonds to paint and repair her home. The savings bonds had $10,468 in interest that she had to claim as income in one year.

She’s loath to touch more of her savings, especially after that tax bill. She wants to maintain her principal and help it grow, but she neither trusts nor understands the stock market.

“I don’t want to get rich,” she said. “I’m just trying to figure out how to plan the rest of my life.”

Wacker said she shouldn’t worry about running out of money. Even though she’s only getting about 5% to 6% interest, she earned nearly $19,000 last year on her various accounts and plugged it right back into savings. She could use $10,000 a year of that on a vacation or home health care if she likes, Wacker said.

The best overall strategy is to delay spending any tax-deferred money as long as possible. That’s because she earns interest on money that would otherwise go to taxes and because odds are that tax brackets will rise over time, allowing her more income at a lower tax rate in the future.

Shampoe still has about $110,000 in Series EE U.S. Savings Bonds. About $90,000 of those bonds matured this year, but will continue to draw interest at the market rate (about 85% of the five-year Treasury, currently 5.6%) on a tax-deferred basis until 2017.

Since more than 50% of the redemption value of those bonds will be counted as taxable interest, Wacker recommends that she leave them alone as a reserve.

Wacker also suggested Shampoe delay taking out the $27,500 in a deferred compensation account from her last job with the state’s unemployment agency.

Shampoe’s other tax-deferred accounts are $39,000 in three different IRA annuities, all of which have surrender charges for lump-sum cash-outs. In general, Wacker said, annuities are a poor choice for IRAs, because the main advantage of an annuity is that its money grows tax-deferred--and money in IRAs is already tax-deferred.

You get a little extra security with an annuity, he said, but the trade-off is a lower return.

“You could put that money in a Ginnie Mae fund, and over five years there’s a 90% likelihood that you’d have a better return than putting it in the annuity. You’d basically be doing what the insurance company is doing--they’re taking your money and investing it--but you’d be cutting out the middleman.”

Fortunately, the worst charges are with the smallest account, $6,000 in the Zurich Kemper IRA Annuity. The fund pays just 4.4% interest, but has a whopping 20% surrender charge. The only way to get the money out without penalty is to “annuitize” (begin a fixed series of payments), Wacker said. Shampoe should have payments sent directly to another IRA.

When surrender charges expire on her second IRA annuity, which has $18,500 and a 4.95% interest rate, Wacker said she should transfer those funds as well.

The third IRA, with $14,500, is earning 6% and has surrender charges until June 2006. He recommends leaving that money alone, since the return is higher and she’ll have to begin taking minimum distributions from all her IRAs by 2004, in any case.

Thus, with more than half her money ($189,000) in tax-deferred accounts and savings bonds, Wacker thinks Shampoe can afford a careful venture into the stock market by converting $100,000 of her CDs into a balanced index fund of 60% stocks and 40% bonds. He recommends the Vanguard Balanced Index Fund (VBINX) because of its low fees and average five-year return of 18%.

In this fund, he said, Shampoe could largely avoid the volatility of the market, because of the balance of stocks and bonds. And since only about 18% of her total savings would be invested in stocks, even a market crash would leave her relatively unscathed.

“If I was telling you to cash in your CDs and put it in Qualcomm, I think that would be a different story,” he said. “This is a prudent thing to do.”

It will take Shampoe a year and a half to move $100,000 from her CDs to the balanced index fund, since the CDs have varying maturity dates. Knowing Shampoe’s misgivings, Wacker thinks the slow pace will make it easier for her to acclimate to the market.

“It’s like getting into cold water,” he said. “First you’re up to your ankles, then you’re up to your shins, then you’re up to your knees.”

“And then you’re drowning,” Shampoe retorted. But after a good laugh, she said she thinks she can follow Wacker’s plan. “Just as long as I don’t have to buy any oil wells in Bolivia.”

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

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This Week’s Make-Over

* Investor: Joan Shampoe, 67, retired state employee

* Income: $20,000

* Goals: Manage her savings to keep her future secure

* Net worth: About $500,000

Recommendations

* Keep U.S. Savings Bonds as a stable cash reserve.

* As CDs mature, move $100,000 into balanced stock fund and $50,000 to money-market funds.

* Move two lower-interest annuities in IRA to higher-interest investments.

* Use up to $10,000 of interest income to supplement income from pensions and Social Security.

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