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Preparing for Retirement Requires Spending Overhaul

TIMES STAFF WRITER

Greg Shearer, 44, woke up four years ago to the startling revelation that he wasn’t going to die.

Not that death was ever looming ominously. Quite the opposite. He was living high on the hog, going to bars and restaurants, enjoying his boat and his Jet Skis. He simply lived as if there were no tomorrow. That did cause some health problems, but none of them fatal.

“I suddenly thought, ‘Oh, my God. I might live until I’m 80,’ ” he said.

In his characteristically impulsive way, he vowed to accumulate $1 million so he could retire comfortably at 65.

Unfortunately, he has made little progress in the last four years, and that leaves him with just two choices: He can drastically alter his lifestyle today, or he can dramatically reduce his expectations for tomorrow. In short, unless Shearer learns to restrain himself, he’ll never attain the comfortable retirement that he wants, said Margaret Mullen, a fee-only financial advisor in Los Angeles.

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But restraint is something that the Claremont adult-video salesman, who has filed for personal bankruptcy three times, finds exceptionally difficult.

“Greg Shearer is a spender. I’m a single guy. I’m a sales type,” he said. “But I’ve made significant changes in the last few years. I used to be like a sailor on payday.”

Shearer believes he’s considerably more responsible now than he was in the 1980s and ‘90s, when free spending on credit cards and a complete failure to pay income taxes led him to a series of bankruptcy proceedings. After the last one, which was filed about three years ago, he vowed to turn over a new leaf.

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Of course, not everyone believes that his financial about-face is completely sincere. When he went to lease his car a year ago, the leasing agent looked at his credit history and remarked that Shearer appears to file bankruptcy roughly every six years, completing the latest filing less than two years earlier.

“I told him, ‘Well, you’re in luck. It’s only a three-year lease,’ ” Shearer quipped. Translation: If he maintains his pattern, the lease will be paid off shortly before his next bankruptcy.

To his credit, Shearer has saved some money in the last few years. He had about $20,000 in a combination of retirement and savings accounts at the end of October. But, because the vast majority of his portfolio is in technology stocks that have been trounced lately, the value of his accounts has plunged.

Worse still, his balance sheet shows that he spent $9,000 more than he made in 1999 and that he continues to spend more than he earns. Shearer maintains that the numbers are misleading because he may have accidentally double-counted some expenses.

To add to the muddle, Shearer is self-employed and writes off copious business expenses. According to the financial statement he filled out for The Times, his net income--that’s income after taxes and business expenses--was just $2,500 a month, or $30,000 in 1999, a year in which his gross income exceeded $85,000.

“I just have no handle on how much is coming in and where it’s going,” Mullen said while probing for details on a variety of expenses listed on Shearer’s balance sheet.

Shearer leases a 1999 Mercury Grand Marquis, which with insurance, maintenance and gasoline, costs roughly $13,000 a year. His three-bedroom apartment costs $825 per month, but he splits that bill with a roommate. His cost: $4,950 a year. Utilities add $1,500 to his fixed expenses, and he lists his telephone expenses at nearly $9,000 a year--largely because he runs his business out of his Claremont home. Health and renter insurance cost about $2,000 a year.

However, he expects to save considerably on one of his largest discretionary expenses: dining out. He spent nearly $12,000 last year on pizzas and bar tabs, he said. He expects that amount to drop to just $1,200 by next year. Why? He had gastric bypass surgery to reduce the size of his stomach. That not only saves money on food, but also on prescription medicines, which were needed to deal with medical problems caused by his obesity. Before the late-August operation, Shearer, who is 5-feet-7, weighed 369 pounds. He’s now down to less than 300.

“I didn’t do it to be pretty,” he said. “That’s eliminated $150 a month in prescription drug costs.”

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Now that he doesn’t have as many medical costs and won’t be eating out as much, he expects it to be a cinch to save. However, Mullen cautioned him about being unrealistic. His surgery was only a few months ago, but he has been overspending all his adult life.

Moreover, even assuming that Shearer makes major cuts in meal and medical expenses, the $1 million that he wants to save for retirement won’t be enough to keep him in the style to which he’s become accustomed, Mullen said. By piecing together information from Shearer’s balance sheet, Mullen estimated that Shearer’s personal expenses amounted to about $4,000 per month.

“At his present level of spending, $1 million would only last him into his 70s,” Mullen said. Once you adjust for inflation, it’s clear that he’ll need considerably more--closer to $1.3 million--if he wants to live comfortably into his 80s.

Shearer objected to this analysis, saying that his expenses were certain to fall when he retired. But Mullen said there was no reason to believe that was true. In fact, although some people find that their expenses drop significantly when they retire, others spend more.

Those who spend considerably less have a few things in common: They typically own their own homes, which they can pay off before leaving the working world. They also are prodigious savers who sock away 10% or more of their gross income. They may also have work-related expenses, such as work wardrobes and transportation costs, that cease when they retire; and some may have paid off their cars.

For Shearer, none of those things is true. He doesn’t own a house. He leases his car. He works from home and does the bulk of his business over the phone. The amount he saves is considerably less than 10% of his gross income, although at roughly $5,000 a year, it’s a substantial chunk of his stated net income.

Mullen estimates that Shearer needs to save roughly $15,000 annually from now on to finance today’s lifestyle in retirement.

To do that, she said, he first needs to overhaul his investment portfolio.

Shearer has three stock trading accounts. All of them are invested primarily in technology stocks, some of which have declined in value by 50% or more since he purchased them. He also owns a few shares in two mutual funds--Invesco Telecommunications and Firsthand Technology Value --that have performed well over time but own many of the same stocks he owns separately.

“I started out buying just mutual funds and did fine with that,” Shearer acknowledged. “But then I started talking to friends, and the next thing you know, they’re recommending stocks and I’m looking into them. With peer pressure, I’m buying stocks that I shouldn’t own.”

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Mullen recommended that Shearer stop trying to pick individual stocks. Although individual stock selection can make sense for people with fairly large portfolios and a certain amount of investment expertise, Shearer hasn’t enough money to properly diversify his portfolio and doesn’t appear to be a whiz at stock selection. Instead, he should stick with a balanced selection of diversified mutual funds.

Meanwhile, Shearer also needs an emergency fund--in case he has more medical problems and finds he can’t work for a while, Mullen said. His only non-retirement account is the $1,500 or so that he has invested in half a dozen volatile technology stocks.

Shearer can either sell those stocks and reinvest in safe, liquid vehicles such as money market accounts and certificates of deposit, or he can keep those investments and try to establish an emergency fund with new savings. But, given how much he needs to commit to new retirement saving, adding even more to the savings stockpile could be difficult.

In reality, Mullen is not hopeful that Shearer will follow the plan at all.

“You think that even if I come up with a plan, I won’t follow it because I’m a spender, right?” Shearer said.

Mullen shrugged. “Sometimes the advice I end up telling people is that I can’t control what you spend. But, if you want this goal, you need to save this amount.”

Shearer has been more responsible with his money recently, Mullen acknowledged: “But two months of recent history doesn’t speak to the rest of your life.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investor: Greg Shearer, 44

* Gross annual income: $85,000 to $110,000

* Net income: Varies; $30,000 in 1999

* Goal: To save enough to retire comfortably at 65

Current portfolio

* Assets: $1,500 in a taxable brokerage account; $3,700 in a Roth IRA; $16,000 in a SEP-IRA

* Debts: $5,500 in credit card debt

Recommendations

* Switch from a SEP-IRA to a Simple IRA, which will allow him to save up to $6,000 a year, regardless of taxable income.

* Continue contributing the maximum of $2,000 annually to a Roth IRA.

* Save an additional $500 monthly in taxable accounts to finance retirement. (Saving in taxable accounts is necessary because Shearer is starting late and needs to save more each year than he can legally contribute to retirement accounts.)

* Create an emergency fund to handle expenses in case he’s disabled and unable to work.

* Switch investments from individual stocks to mutual funds, which will diversify his holdings.

Recommended portfolio

* Shearer’s retirement assets should be divided among six funds--the first two of which he already owns--to provide more diversification:

* 15% in Invesco Telecommunications

* 15% in Firsthand Technology Value

* 20% in Janus fund

* 20% in Artisan International

* 15% in Artisan Mid-Cap

* 15% in Managers Special Equity

* Non-retirement savings should go into the Schwab Total Market Index fund, which invests in the 5,000 stocks that make up the Wilshire 5000 index, or another broadly diversified index fund.

Meet the Planner

Margaret Mullen is a fee-only financial advisor in Los Angeles, who specializes in portfolio management, retirement planning and distribution rules.

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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 from https://www.latimes.com/makeoverform. Recent columns are available at https://www.latimes.com/makeover.

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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