Front Page || Main Index || Corpus Christi News || Business || Texas || Sports || Entertainment || Selena
Monday, Aug. 24, 1998
Retiree should restructure portfolio
Woman, 64, needs more income before paying off mortgage, assisting sons
By JEFFREY TOMICH
Staff WriterHelen McReynolds, a 64-year-old widow living in Corpus Christi, wants to rid herself of debt and help her two sons afford new homes.
McReynolds (not her real name) has $400,000 in assets, mainly in annuities, an IRA and certificates of deposit. Her only debt is a $32,000 balance on her home loan.
Her yearly income of $31,000 comes from her pension, Social Security, interest and dividends. Annual expenses run about the same, led by her mortgage, credit cards and financial help for her sons.
McReynolds' financial goals include getting her house paid off, saving enough to pay cash for a new car, minimizing taxes for her heirs and helping each of her sons build new homes.
She has several questions regarding her finances, including: Should she convert her traditional IRA to a Roth IRA? Are her investments too aggressive? And should she make efforts to pay off her mortgage ahead of schedule?
Durward Thompson, a certified financial planner, chartered financial consultant and chartered life underwriter with American Express Financial Advisors, analyzed this case.
Thompson said McReynolds probably has enough money to support herself during her lifetime, but she could rebalance her portfolio to provide her with more income.
He said she should look at her budget first.
``Her expenses are about $31,000, while her net after-tax income is about $25,000. She needs to address this deficit spending, because she may be using up her assets more rapidly than she wishes and this could affect her reaching her other goals,'' he said.
Topping McReynolds' list of financial goals is paying off her mortgage. She wonders if she should increase the amount of her monthly house payments to get it paid off more quickly.
Thompson said doing so would further reduce her cash flow at a time when her expenses already exceed her income.
McReynolds currently is paying an extra $200 a month, which will pay off the mortgage within a reasonable time and allow her to keep her investments intact, Thompson said.
``It would be my basic thought to just continue as she is doing now,'' he said.
Thompson said McReynolds should probably stay with a traditional IRA rather than convert to a Roth IRA, where contributions are taxable up front but can be withdrawn tax-free after retirement.
When choosing an IRA, Thompson said investors need to consider their current tax bracket, future tax bracket and length of time before money will be used.
In McReynolds' case, she also needs to consider whether money paid in taxes when converting to a Roth IRA will be made up through higher earnings, Thompson said.
Because she is in a 15 percent tax bracket and already retired, she probably should not convert to the Roth IRA, Thompson concluded.
About 75 percent of McReynolds' investments are in growth mutual funds, which have bolstered her portfolio during the past 3 years. But she is concerned about whether she should minimize her risk exposure.
Because she is retired and needs income from her investments, McReynolds probably can adjust her portfolio to yield additional income while cutting back or eliminating the reduction of principal, Thompson said.
The total of interest and dividends that McReynolds declared as taxable income from her savings and mutual funds is about 3 percent of her investments, he said. So she should be able to increase her income, meet expenses and still have money in stocks for growth purposes.
``It is very easy for all of us to assume that we will continue to make the same profits in the future from our stocks as we have made the last three years or so,'' he said.
``However, it is also important to remember that the stock market has averaged about 10.5 percent since it was founded. I think we are fooling ourselves if we base our future expectations on the 15 percent-plus figures which recent increases have provided us.''
If McReynolds rebalanced her regular investment account, it likely would create some taxable capital gains, Thompson said. So, she would probably want to make the most of the adjustments within her IRA or her variable annuity because gains realized there would not generate any current taxes.
He suggests that she may want to investigate how much she can withdraw from her annuity without paying a redemption charge in order to generate additional income.
McReynolds also wanted to know if she has too much invested in CDs. Thompson said the amount invested isn't the issue; asset allocation is. She needs more income, but most of her dollars are invested in longer-term growth funds.
Thompson suggests that she get additional financial advice to determine the mix of investments that is best for her.
Besides accumulating wealth, McReynolds wants to minimize taxes for her heirs. Because her estate is less than $625,000, federal estate taxes shouldn't be a concern for her, Thompson said. However, she does need to make sure that her will is up to date.
She also wants to help each of her two sons afford to build new homes.
Thompson said she may have the extra dollars in her portfolio to help her sons without jeopardizing the income stream she needs during her lifetime.
``However, she needs to look closely at the amounts needed and be judicious about any gift-giving,'' he said. ``The problem is that she could give money to the sons with the idea that they could help her financially later in life.''
McReynolds also wants to know if she should establish a living trust.
Living trusts are essentially arrangements under which a person transfers ownership of their assets into a trust, then designates a trustee to manage the property according to the holder's wishes.
A primary reason for living trusts is the high cost of probate, Thompson said. While probate costs are high in some places, that's not the case in Texas. Here, probate costs are about the same as the cost of most living trusts, he said.
So, Thompson said, there is no reason for McReynolds to buy a living trust if she has a valid, up-to-date will and doesn't want to change anything.
Finally, McReynolds wants to know if she should buy a long-term care policy.
Long-term care insurance is another name for nursing home insurance. It is especially important for people concerned about passing their estate to heirs without using those dollars to pay for nursing home fees, Thompson said.
Thompson said single people such as McReynolds may not need long-term care insurance for the entire amount of nursing home cost. It is more likely that she would want to purchase a policy that would pay a portion of the nursing home cost and allow her pension and dividend income to pay the balance.
The Caller-Times is seeking people to share their financial situation with the newspaper's readers. Your name will not be used in a story and the financial planner's advice is free. Call Caller-Times business writer Jeffrey Tomich at 886-4316, e-mail him at tomichj@scripps.com or write him at P.O. Box 9136, Corpus Christi, 78469.Post your comments about local news eventsFront Page || Main Index || News || Business || Texas || South Texas Outdoors || Birdwatching || Sports || Entertainment || Selena || Education || South Texas Attractions || World Wide Web