Stocks Too Big a Bet to Reach Early Goals
Rick Petitfils knows the risks of gambling firsthand. He remembers well the night he lost $4,000--more than two months’ take-home pay--playing blackjack in Las Vegas.
“I was doing really well in the beginning. That’s how it always starts, and every time I lost I would bet a lot more,” recalled Petitfils. “That’s why I don’t go to Vegas very often. I know where my faults are.”
Or does he? Petitfils, a 48-year-old supervisor at a Sav-on drugstore in Agoura Hills, may be avoiding the blackjack tables, but he has plowed such a big chunk of his savings into the stock market that he may be gambling with his goals of taking early retirement and paying for his two kids’ college educations.
“If Rick wants to retire in six years, he needs to spread his chips around the table,” said Chris Reedy, the founder of Reedy Asset Management in Newport Beach. “Rather than ride the roulette wheel, Rick should reduce his stock exposure and increase his bond allocation.”
On the bright side, he brings a sizable stake to the table. By forgoing all but a few small luxuries--such as the occasional vacation to Hawaii or British Columbia, air fare courtesy of a family connection--he and wife Maria have built a $267,000 nest egg. Not bad on a combined annual salary of $56,000.
His share of that income--$35,000--is the result of a decision 10 years ago to accept a 50% cut in pay in return for a job that let him spend more time with his family. Until 1992, he was a district manager for Kentucky Fried Chicken, overseeing the operations of as many as 20 stores at a time. He worked 14-to-15-hour days and drove about 35,000 miles a year.
“I didn’t see a lot of my son when he was growing up; I couldn’t go to a lot of his functions,” he said. “Now I live a mile from my job.”
It helps that Maria, 44, plans to continue working as a teacher’s aide for the Las Virgenes Unified School District until she’s 62. And the family’s overhead is low. The Petitfils own their three cars and their only debt other than a small mortgage is a 3.5%, $15,000 Small Business Administration loan they used to rebuild their home after the Northridge earthquake.
But with 85% of his portfolio invested in stocks--and more than a third of that in risky technology shares--Petitfils has placed himself at the mercy of an unforgiving market. In the last few months, for instance, the value of his portfolio has tumbled more than 11%.
“The equity markets are the most volatile investment tool there is. The market is for people with long-term horizons, and Rick needs to adjust for his phase of life,” said Jim Macy, vice president of investments for Reedy Asset Management.
Typically, a 48-year-old is years away from the period when a shift to more conservative investments--such as bonds and certificates of deposit--is necessary. But in this case, the goals of early retirement and paying for collegeare more immediate.
Ryan Petitfils, 18, is a freshman at California Lutheran University in Thousand Oaks, where he has a scholarship that supplies $10,000 a year if he maintains a 2.7 grade point average and works 10 hours a week for the school. That and student loans, $6,000 a year from mom and dad and contributions from Rick Petitfils’ parents take care of the $27,000 annual cost. Daughter Michelle, 12, is a few years away.
To reduce the risk in Petitfils’ portfolio, the planners said he should cut his stock exposure to 60% to 65%. The remaining 35% to 40% should be invested in a laddered portfolio of fixed-income investments, such as Treasury bonds and high-grade corporate bonds. A laddered portfolio is invested in securities with a range of maturities. As securities mature, the money is reinvested in new securities, usually at the longer end of the maturity range.
“Our goal is to reduce volatility in Petitfils’ portfolio by replacing equity-heavy and tech-heavy growth assets with a less volatile combination of income-producing assets,” Macy said.By the time he’s 55, Petitfils’ 401(k) account from KFC should be worth about $165,000. At that point, he can use the money to purchase an annuity that would provide income of $13,800 a year over 20 years assuming a relatively modest 6% yearly return, the planners said. Returns from the couple’s cash and stock holdings should add $1,770 or so to their annual income, and Petitfils’ pension from KFC will contribute $3,600 annually.
The grand total in year one of early retirement, including Maria’s salary: about $40,000, which should be more than enough to take care of the couple’s expenses, allowing them to maintain their lifestyle plus a few luxuries and a vacation or two, the planners said. If Social Security remains intact, all the better--the planners chose not to include it in their analysis.
After the money from Petitfils’ 401(k) is depleted, the couple can rely on Maria’s teacher retirement account, the pension from KFC and the couple’s individual retirement accounts--the two IRAs are currently valued at a combined $144,000--to see them through retirement, the planners said.
The Petitfils own two zero-coupon bonds maturing this year at $21,500 that they planned to sell to come up with their $6,000 annual contribution to each child’s education. But the planners suggested making the bond money work even harder by using it to fund a 529 College Savings Plan for Ryan that can be rolled over later for Michelle. California’s version allows parents to put more than $120,000 into a tax-deferred account invested in a changing mix of stocks and bonds--more stocks at first and more bonds as the college years approach--that will be taxed at the child’s rate when the money is withdrawn for college expenses.
Macy and Reedy also recommended using $10,000 from the bond proceeds to bolster the couple’s emergency fund.
“The majority of your assets are in sheltered or retirement accounts, so you need some avenues to tap money without doing something that would have tax or penalty implications,” Macy said.
Petitfils is far enough along in his retirement preparations that he might consider easing up a bit, the planners said.
“You are in a position to meet your financial goals, so if you want to live a little, live a little,” Macy said.
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This Week’s Make-Over
* Subjects: Rick Petitfils, 48, and Maria Petitfils, 43
* Occupations: Rick: supervisor at Sav-on; Maria: teacher’s aide
* Annual income: $56,000 combined
* Goals: Early retirement for Rick and college tuition help for son Ryan, 18, and daughter Michelle, 12
Current Portfolio
* Retirement savings: $106,000 in Rick Petitfils’ 401(k) plan, 85% invested in stock mutual funds; about $144,000 in two individual retirement accounts invested in mutual funds and a few individual stocks
* Other investments: $17,000 in individual stocks, including Cisco Systems, Oracle and Nortel Networks
* Bonds: Two zero-coupon bonds worth $21,500 at maturity
* Cash: $10,000 in checking accounts
* Other assets: $345,000 in home equity; Geo Prizm, Dodge Caravan, Saturn; coin collection valued at $5,000
Recommendations
* Reduce exposure to stocks and boost income-generating investments
* Sell zero-coupon bonds when they mature and put $10,000 into a money market account to beef up emergency fund. Use the rest to open a 529 Education Plan account for Ryan that will roll over to Michelle.
* Put all future education savings into the 529 plan.
* Live a little.
Meet the Planners
Chris Reedy is founder and chief executive of Reedy Asset Management in Newport Beach. Jim Macy is the firm’s vice president of investments.
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Stephanie Losee is a regular contributor to The Times.
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