Money Makeover

By Melanie Stevens

November 16, 2007 11 min read

MONEY MAKEOVER

Couple makes plans for active, secure retirement

By Melanie Stevens

Copley News Service

Tom and Sandy Garcia celebrated their first wedding anniversary with a jazz cruise through the Caribbean in October.

The San Diego couple agree that they'd love more free time, and the extra cash, to be able to travel to their favorite destinations more frequently.

Fortunately for the Garcias, who are both in their 60s, retirement is only a year or two away. And they're fairly confident that their combined pension and retirement savings will provide a sufficient income to pay the bills and allow them to afford the occasional adventure.

"I was a single parent for so many years that it was important to be conservative with my lifestyle," said Sandy Garcia, 64. "Now that I'm approaching retirement, we'd like to spend our time and money doing the things we love: skiing, tennis, photography, maybe an art history or computer class. And we definitely need enough money for travel."

Garcia will be retiring from her career as a human resources supervisor in June and has been a relentless saver over the years. She has four retirement plans totaling about $268,100 in addition to a pension, which will give her an extra $4,400 per month.

Garcia also elected to participate in her employer's Deferred Retirement Option Program, or DROP, which allows pension-eligible workers to accrue additional benefits if they keep working. During the five years of the program, the money she would have received in pension had she retired is paid into a DROP account. By June 2008, when the five-year period ends, that will give her an additional pension worth about $265,000.

Tom Garcia, 62, has some financial stability of his own to add to the couple's retirement savings. His 40-year career for the federal government has earned him a pension of about $4,500 monthly.

To make retired life even more financially feasible for the couple, the Garcias are each well-covered with retiree health care plans from their employers, with little cost to them in retirement.

Despite all the positives working in their favor, the couple remain somewhat unsettled about the details leading up to Sandy Garcia's retirement. There are still a few big questions to consider: How should they distribute and manage their savings to make sure there's a balance between the fun stuff and their bills? And how can they ensure that they won't run out of money?

There is also some debt to think about. The couple has a $350,000 mortgage and a $75,000 home equity line of credit to pay off, in addition to some home renovation projects they'd like to complete.

The Garcias wonder whether Tom should retire next year with Sandy or continue to work an additional few years to help them get ahead of these expenses and put them in an even better financial situation in the long run.

"We don't have a financial plan and no real investment strategy," Tom Garcia said. "We wanted someone to tell us what kind of money we'll have to indulge in our favorite pastimes and hobbies. We don't want to look at retirement and find out along the way what we can't do, but we want to go into it knowing what we can do."

To get some guidance for a few of these final decisions before their pending retirement, the Garcias volunteered for a free money makeover sponsored by their local newspaper, the San Diego Union-Tribune, and the San Diego chapter of the Financial Planning Association. The association chose Rick Mayes, a certified financial planner with Mayes Financial Planning in Carlsbad, Calif., to work with them and make recommendations.

After an initial review of their finances, Mayes validated the couple's confidence that their savings will carry them comfortably over the next few decades. He made some recommendations to work through over the next year that would ultimately put the couple in a more financially secure situation through their lifetimes.

"The Garcias are planning on being very active in retirement, so they're going to need enough discretionary money to be able to do all the things on their list," Mayes said. "In general, they are in good shape and their pensions are excellent. But the issue is that their monthly expense level is a bit high, so I believe they've got to make a decision on where to cut back. I'm confident they can comfortably live on less and still do a lot with their money."

While factoring in the couple's combined annual income of $161,500, their mortgage and home equity loan payments, Mayes calculated that they spend about $118,000 annually, a figure that doesn't include taxes or retirement savings.

Although Mayes agrees with the couple that they could continue to support this lifestyle, in order to ensure that they don't outlive their assets, he recommended that they focus on decreasing their annual spending by $18,000.

"We haven't really ever sat down to estimate what our monthly living expenses are," Sandy Garcia said. "We're now living comfortably, so we feel like $18,000 to cut back is a large amount of money. But we realize, too, that when we retire we'll have less capital coming in. We plan on taking a hard look at what our expenditures are and where we'll be able to tighten our budget."

Tom Garcia could beef up his savings to help them as retirement approaches by first paying off the remaining $1,500 balance of a Thrift Savings Plan loan. He could then increase his contributions to his pension plan to 10 percent of his total salary.

Even though it's not absolutely necessary for Garcia to continue working, Mayes recommended that he think about remaining in the work force for an additional two to four years, especially because there's a possibility for promotion and an increased salary.

"I agree that working another year or two would probably help," Garcia said. "I'm in a good place with my employer. We're doing some great things and it's a place where there's still room for growth for me. I think the extra years of income will help offset some of our remaining expenses."

Keeping Garcia in the workforce for a few more years would also help the couple save on taxes and allow them to gradually adjust to a slightly different income level. The couple could use the time to focus on saving an extra $1,000 a month to grow their cash reserves from $10,000 to $25,000, Mayes said.

One way to help reduce living costs before Sandy Garcia's retirement is to pay off the couple's $75,000 home equity loan as soon as possible.

Mayes advised her to withdraw the $83,650 balance from her after-tax contributions in her Supplemental Savings Pension Plan. The money would cover the home equity loan, or HELOC, the few remaining home renovations they'd like to complete and a down payment on a new Prius they're planning to buy.

"The biggest fixed cost for them is their mortgage, including the HELOC," Mayes said. "They're spending about $30,500 per year, which is 26 percent of their total expenses. By paying off the HELOC, they'll be taking care of about $6,000 of continued annual interest payments."

Several distribution options are available to Sandy Garcia for the remaining balance on her various retirement savings plans, including her $265,500 DROP benefit. She could elect to: take lump sum withdrawals of her various plans and contributions; take a lifetime annuity that would allow her to receive smaller monthly payments for the rest of her life; or take a 20-year annuity, which would give her larger monthly payments.

To allow the couple to have this money as needed - rather than keep it limited to a fixed monthly amount - Mayes advised Sandy Garcia to take lump sum distributions for each of her accounts and roll them over into an IRA.

"Sandy wanted to make sure that they had some discretionary money, so in order to give them that flexibility and control over their own assets, I'm leaning toward her taking the lump sum," he said. "But they've still got time to think these options over. There are some good interest rates being offered if she takes an annuity."

Garcia still has one year of contributions toward her retirement savings, so Mayes suggested that she think about the options he's presented to her and get some financial advice again closer to retirement. If Garcia takes the lump sum, it would be beneficial to have the couple's assets managed professionally so some of the burden would be taken off the couple when it comes to distribution, Mayes said.

"We've always thought that once retired, we would like someone to manage our money for us," Sandy Garcia said. "Neither one of us wants to spend our lives watching the stock market; it's not our expertise."

The Garcias would especially like their future asset manager to follow Mayes' investment-allocation recommendations. In order to achieve a 6 percent rate of return, the couple will need to increase their equities from 14 percent to 30 percent of their portfolio.

More specifically, Mayes advised them to increase U.S. stocks from 15 percent to 20 percent; increase international stocks from 1 percent to 10 percent; reallocate 59 percent in bonds to reflect 50 percent in U.S. bonds and 10 percent in international bonds; and decrease cash from 25 percent to 10 percent.

The couple also will need to get their estate planning documents in place and purchase a $1 million umbrella policy for better protection of their assets.

"I think we're in a very fortunate place, but there were still questions," Tom Garcia said. "Rick made us feel very confident about the way we're going into retirement, and it was an experience that got us to draw information together and really start to look at our budget. We're realizing that you have to spend less money when you have less to spend."

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