Lofty Retirement Goals Call for Some Risk
At 52, Christopher Richards has planned out the next 36 years of his life as carefully as a military operation. Work 12 hours a day, six days a week until he’s 60. Then retire with enough money and assets to see him through until he dies at 88.
OK, he’s not really planning to die at 88. That’s just the prediction from the actuarial tables in Microsoft Money. Richards uses the software to fine-tune his financial plans--from selling his homes in Signal Hill and Palm Desert after he retires to buying new homes in New Mexico and Montana to leaving a scholarship fund for the college in his adopted hometown.
On the computer, his financial future looks fine. But Richards, childless and twice divorced, is uneasy about depending solely on software to map out his retirement.
Tim Wallender, a living, breathing Southland financial planner, agrees that too much virtual reality can be a problem when it comes to retirement planning.
“Programs like Quicken and Money are very valuable for budgeting and letting people see the compounding effect of the money they’re putting away,” he said. But during periods of extreme uncertainty in the stock market--like now--it’s vital that investors resist the urge to let a computer do their thinking for them.
“You want to watch things month by month over the next [few] months,” Wallender said. Richards should be looking for ways to boost returns on his fixed-income investments and perhaps tiptoeing back into beaten-down growth and international mutual funds with regular investments--a method known as dollar-cost averaging. “That way, when things do turn around, you’ve purchased some positions at lower cost.”
Such moves may be necessary for Richards to meet his rather ambitious goals, which will require $1.3 million at retirement. He needs to adjust his portfolio to juice up returns, Wallender said, not easy given the current market environment.
Richards makes about $82,000 a year as a technician for a beverage company assembly line, thanks to working prodigious amounts of overtime, which almost doubles his salary. “Of course my social life is nil and I haven’t been to the movies for two years,” he said, “but I’m trying to max out my earnings so I can retire early.”
Richards lives in his Signal Hill condominium, which has a sweeping view of Long Beach, and rents out his house in Palm Desert. Both properties have appreciated and are worth about $250,000 each.
He spends about $4,500 a month, with almost $3,000 going to mortgages and other housing expenses, and saves $1,500 a month in his 401(k), a Roth IRA and U.S. Savings Bonds.
Richards plans to sell the Signal Hill condominium when he retires in 2010, then live frugally for two years in his Palm Desert home until his Social Security payments start in 2012 and he can sell the house without a tax penalty.
In the meantime, he’ll be looking for a home in a secluded part of New Mexico. And if his plan holds, he wants to purchase a summer home in Montana by 2015.
Starting at age 62, Richards will get about $29,500 a year from Social Security and his company pension. Assuming Richards lives to 90, Wallender said, he’ll need $1.3million in savings to provide the $74,000 in annual income he’ll need to finance his retirement goals.
So how does he make it happen?
For starters, nearly half the $1.3million will come from his two properties. Wallender expects their value to increase by about 6% a year, so Richards can sell his condo for about $410,000 in 2010 and his Palm Desert home for about $414,000 in 2012. After paying off his remaining mortgages, Richards should clear about $638,000.
Richards needs average gains of 8% over 101/2 years on his Roth IRA, 401(k) and other investments to make the remaining $662,000. His portfolio is fairly conservative, with an emphasis on savings bonds and fixed-income investments.
But Richards is racing to meet a deadline, and Wallender thinks he should be willing to take on more risk in hopes of boosting his returns. Among the options: moving some assets into higher-yielding bonds and shifting some money from bonds to riskier but potentially more profitable stock mutual funds.
“When you’re this close to retirement, you need to optimize your portfolio and do whatever you can do to swap out low-returning assets,” Wallender said.
He advised Richards to cash in his $55,000 in savings bonds and invest it in the Vanguard Short-Term Corporate fund, a bond fund with 10-year average annual returns of 6.83%. That beats the 4.5% to 5.5% he’s getting on the savings bonds. If it earns 8% a year, that money will grow to about $123,000 in 101/2 years. At 5%, it will increase to $83,000.
Richards also should switch the $17,508 in his Roth IRA from the Phoenix-Duff & Phelps Core Bond fund to the same Vanguard corporate bond fund to save on sales charges and management fees. He also should increase his annual Roth IRA contributions each year until he reaches the maximum of $6,000 (for people over 50) in 2008. With an 8% return, the Roth will grow to about $69,000 in 101/2 years.
Richards should shift the 40% of his 401(k) plan that’s now invested in the Vanguard Wellington fund--a “balanced” fund that invests in both stocks and bonds--to Vanguard Total Bond Market Index fund to provide more of a pure play in bonds, the planner said.
Meanwhile, he should keep contributing as much as possible to his 401(k) plan, increasing the amount each year as the contribution limits rise until he reaches $15,500 annually in 2004--the most Richards thinks he can afford. Richards should continue putting 35% of his 401(k) contributions in the Vanguard 500 Index fund, which tracks the S&P; 500, and 25% in Vanguard Small-Cap Index fund. The remaining 40% in new contributions should be split between the Vanguard bond index fund and Vanguard International Growth fund, the planner said.
The international fund is down almost 29% this year, but it’s a good buy now, Wallender said. The small-cap fund invests in shares of small companies, which many analysts think will outperform blue-chip stocks this year. If Richards can achieve an average annual return of 8%, his 401(k) should be worth about $550,000 in 101/2 years.
Given the chance that the market’s gains will fall below historical averages for the foreseeable future, Richards should be prepared to rein in his goals. If he averages 7% on investments over the next 101/2 years, he’d have about $1.16 million in assets at retirement. That would give him an annual income of about $66,500 a year, and probably would jeopardize his dream of a second home in Montana.
But Richards’ ethic of saving and attention to financial details give him an excellent chance of meeting his goal, Wallender said. And Richards, who made most of Wallender’s suggested changes within a few weeks of the recommendations, is staying flexible.
“The home in Montana is a dream, but it’s nice to know it’s a dream that could come true,” he said. “And who knows? By the time I move to New Mexico, I may want to stop traveling and just stay home and read my books.”
*
(BEGIN TEXT OF INFOBOX)
This Week’s Money Make-Over
* Subject: Christopher Richards, 52
* Annual income: About $82,000
* Goals: To retire at 60 and buy houses in New Mexico and Montana
Current Portfolio
* Real estate: $250,000 condominium in Signal Hill; $252,000 house in Palm Desert
* Retirement savings: $147,000 in 401(k) account invested in the S&P; 500 tracking Vanguard 500 Index fund, Vanguard Small-Cap Index fund and Vanguard Wellington fund; $55,000 in U.S. Savings Bonds; $17,508 in his Roth IRA, invested in Phoenix-Duff & Phelps Core Bond fund
Other assets: a Lexus SC300
* Debt: $160,000 mortgage on his Signal Hill condo, paying $1,463 a month over 15 years; $126,000 on his Palm Desert home, paying $1,287 a month on a 15-year loan; $1,500 credit card bill, which he is paying off at $500 a month
Recommendations
* Sell savings bonds and invest instead in Vanguard’s Short-Term Corporate fund to get a higher rate of return.
* Roll Roth IRA out of Phoenix-Duff & Phelps bond fund into Vanguard’s Short-Term Corporate fund to get lower fees, less risk and higher returns.
* Take Vanguard Wellington fund out of 401(k) and put 40% of his money into Vanguard Total Bond Market Index fund.
Split 40% of new contributions to 401(k) plan evenly between the Vanguard bond index fund and Vanguard International Growth fund.
* Consult with a financial planner at least once a year to make sure his investments are on track for early retirement.
Meet the Planner
Tim Wallender is a fee-only certified financial planner. He is president of Strategic Index Money Management-Wallender & Associates, in Manhattan Beach and La Quinta.
*
Jeanette Marantos is a regular contributor to The Times.
