Nurse’s Retirement Plans Have Changed Course Post-Divorce

Gratia A. Brown is among more than 1 million Americans who will get a financial boost in the coming days, when a bill repealing the Social Security earnings limitations after normal retirement age is signed by President Clinton.

Brown had originally planned to retire from her job as a registered nurse next month, when she turns 65. But the birthday will be bittersweet. After a costly divorce and years of overly conservative investments, she realizes she doesn’t have enough money to retire quite yet.

The new law will enable Brown to save substantially more in the next few years than she otherwise could have, because it allows her to work and collect full Social Security benefits. But Brown still needs to cut expenses and take more risks with her investments, said Mark A. Taylor, a certified financial planner in San Clemente who reviewed her finances for The Times. In particular, he said, she should move money out of a fixed annuity that is too conservative for her needs.

As recently as two years ago, Brown envisioned retiring comfortably to play golf and spend more time with her husband. But their marriage ended last year, and terms of the divorce settlement required Brown to withdraw about $32,000 from her retirement savings, mostly to pay for her husband’s equity in their Dana Point condominium. That move resulted in a $10,000 tax bill.

The emotional price was high, too, but Brown relishes her newfound independence. She learned how to sell her car, buy another and arrange financing; she also recently refinanced her home loan for a better interest rate.

“For all of my life someone else has either made or helped me make major decisions,” she said. Now, “at age 64 I am making major decisions on my own for the very first time.”

Brown also concluded that she enjoys her job too much to quit “cold turkey,” despite her adult children’s pleas that she retire.

Brown is a triage nurse fielding telephone calls at St. Joseph’s Heritage Health Care Foundation in San Clemente. She helps diagnose and guide patients to the medical treatment they need and trains other registered nurses.

It is fortunate that she enjoys her job, because Taylor calculated that if she were to retire now, she would run out of money by age 75. That’s assuming inflation averages about 3% a year, her expenses remain the same and her investments generate an annual return of 7%.

By boosting that return to 9% or 12%, Taylor’s analysis showed that the money would last until she is 77 and 83, respectively.

The key decision Brown faces is what to do with $227,500 that is locked in a fixed annuity generating 6% interest. She is depleting the annuity now, receiving $1,000 a month. That, along with her nursing wages, provides an annual income of $48,000.

Fixed annuities are not necessarily bad, but they are more appropriate for risk-adverse retirees who find the income stream from the annuity adequate. That’s not Brown’s situation, Taylor said.

“What we find--especially with clients with smaller amounts of money--is that people can’t afford to not take risk,” Taylor said. “You need to take a certain amount of risk. Otherwise, you’ll be working a long time.”

Brown would have to pay surrender charges if she were to cancel the annuity outright, but Lutheran Brotherhood, the financial-services company that manages Brown’s fixed annuity, would allow conversion to a variable annuity.

Variable annuities provide the flexibility of investing in the stock market, bonds, cash and other vehicles with the potential for higher returns. There would be no fees to make the switch, but Brown is limited to Lutheran Brotherhood’s investment choices.

Not all those choices are good, Taylor said. Lutheran Brotherhood’s large-cap blend and high-yield bond funds are above-average performers, based on Morningstar’s ratings and research, but its intermediate bond and international stock funds are average. Taylor also noted that Lutheran Brotherhood does not offer funds specializing in international emerging stocks or small-cap value stocks, two asset classes he recommends to diversify one’s portfolio.

Brown could transfer her annuity to another financial services company to obtain more investment choices and further diversify her portfolio, but Lutheran Brotherhood would impose a 5% surrender charge, totaling $11,375. That penalty shrinks by 1 percentage point a year, dropping to 4%, or $9,100, in July, and sinking to zero in July 2004.

Some financial-services companies would offset the surrender charge by issuing a credit to the newly transferred account, Taylor said. In some cases, the credit might equal a 4% surrender charge.

Brown has another option, which she learned by reading the fine print of her annuity contract. Brown may transfer 10% of her account each year without penalty. She could transfer 10% before July and another 10% after July, an amount exceeding $40,000. Taylor suggested she start diversifying her portfolio with those funds, starting with the sectors that aren’t represented in her new variable annuity.

Taylor also proposed that Brown stop withdrawing $1,000 a month from the annuity so that all the money can grow tax-deferred while she continues working. Brown found that idea daunting at first, questioning how she could possibly slash her monthly expenses by $1,000.

But the desire to make her nest egg last beyond age 83 prompted Brown to reexamine her personal finances, which she monitors on a computer software program.

“This process has had a real impact on me, realizing I have to learn to live on less,” Brown said, acknowledging she found room for improvement. “Last July I spent $780 on clothing, and I wear uniforms five out of seven days. The other two days I spend doing chores and errands! It’s one thing to track everything on Quicken, but quite another to analyze what the figures mean.”

If she can’t cut $1,000 in spending every month, Social Security benefits can fill in some of the gap. Based on her ex-husband’s work history, her benefit will be about $600 a month, higher than what she would get on her own work record.

Brown’s generous three children represent one asset that’s intangible, yet priceless.

They volunteered to pay off her mortgage when they learned Brown had decided to continue working because of her concerns about exhausting her savings. And her oldest son insisted on paying for a summer vacation in Finland, after he learned she was contemplating canceling for financial reasons.

Brown said she was surprised and touched by her children’s support, but perhaps they’re only following their mother’s example. Two years ago, Brown gave her children a power boat and a log cabin in northern Minnesota--without any thought about her own financial future.

Now, they’re repaying that gift by sweetening her retirement.

*

Suzy Hagstrom 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.

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.

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This Week’s Make-Over

* Investor: Gratia A. Brown, 64, registered nurse

* Gross annual income: About $48,000 from her job and an annuity

* Goals: Learn about investments and decide when to retire

Current Portfolio

* Cash and savings accounts: About $10,500

* Assets: About $34,000 equity in condominium and 25 shares of Martha Stewart Living Omnimedia stock valued at about $600

* Retirement accounts: About $240,000 in tax-deferred retirement accounts, most of that--$227,500--in a fixed annuity

* Debt: Nearly $64,000 on home mortgage and a $17,000 car loan

Recommendations

* Convert fixed annuity to a variable annuity and invest 70% in stock mutual funds to boost returns.

*n Assuming Social Security rules change as expected this year, start benefits and stop accepting income from the annuity.

* Withdraw funds from annuity to extent possible without penalty and diversify with other investments. Allocation with suggested funds: 25% in fixed-income funds (Pimco Total Return Institutional, Invesco High Yield); 17.5% in large-cap value (Select America Shares); 20% in large-cap growth (Pilgrim Large Cap Growth, Janus); 17.5% in small-cap funds (Undiscovered Managers Small Cap Value, RS Emerging Growth) 20% in international funds (Scudder Emerging Growth, Artisan International).

* Consider working full time at least two more years, then part time until age 70 to give the retirement accounts more time to grow.

* Participate fully in employer’s 403(b) retirement plan.

* Reduce living expenses.

* Update will and draft medical and financial powers of attorney.

Meet the Planner

Mark A. Taylor is a certified financial planner in San Clemente. His practice is Winthrop Taylor Asset Management, which charges commissions or fees depending on clients’ preference. He is a past president of the Orange County Society of the Institute of Certified Planners.