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Monday, Aug. 31, 1998
Couple's assets may not last if they retire early
Cost-of-living increases, other expenses could outlast savings
By JEFFREY TOMICH
Staff WriterMatt and Laura Sheehan want to retire in three years - the same year their only child is expected to start college. They're concerned about having saved enough money to do both and maintain their standard of living.
The Sheehans (not their real name) live in Corpus Christi. Matt, 46, is a pilot in the military. Laura, 45, is a homemaker. Their 15-year-old son plans to attend Texas A&M University.
The couple's annual income is $88,500, including $425 per month in rental income from a condominium they own in Florida. Yearly expenses come to $72,400, led by $17,700 a year in mortgage payments and $14,500 in income taxes.
Their assets of $611,000 include $390,000 in mutual funds and a total of $31,000 in their son's two college funds. The bulk of their $168,400 in total debt is money owed on their home and condo.
The Sheehans' financial plans begin with getting their son through college and starting him on an early investment plan.
The couple also plans to retire in three years, when Matt gets out of the military, and then pay off their mortgage, travel and launch a home-based business.
The Sheehans have several questions regarding their financial plans, including: Can they retire in 2001 and maintain their standard of living? Have they saved enough to pay for their son's college education? Should they diversify their mutual funds? And, should they have a living trust?
Kurt Emerick, a certified financial planner and vice president of investments for Everen Securities in Corpus Christi, analyzed the case.
Emerick said the Sheehans have done a good job of accumulating wealth. But, because they plan to retire early, they could fall short of being able to fund their retirement and still maintain their standard of living.
``While they have managed to save a lot of money, the strain they will put on their resources over an unusually lengthy retirement is too much to maintain their spending power over the long run,'' he said.
Emerick said the challenge in planning for early retirement is two-fold. First, there's less time to accumulate money. Second, and more importantly, investments must last longer while the cost of living increases.
Cost-of-living increases become increasingly significant when considering a 30-year retirement as opposed to a more typical 15-year retirement, he said. Over a 30-year period, the Sheehans should count on the cost of living to triple.
Matt will get a $36,000 annual pension benefit when he retires from the military.
That gets them most of the way to their goal of retiring early, Emerick said. However, their savings must make up the difference.
Assuming they systematically withdraw money from their mutual funds (increasing at a rate of 3 percent per year to keep up with cost-of-living increases), there is a chance they could run out of money, he said.
In most scenarios, it would take a continuously rising stock market for their assets to last another 30 years, Emerick said.
He said the Sheehans should consider diversification, but they need to be careful not to create a tax problem by realizing a previously deferred capital gain. In other words, they should find out what the tax basis is before selling the shares.
Emerick said the couple should be able to pay for their son's major college costs, such as room, board and tuition, with investment income. However, at their current rate of savings, they may have to pay for smaller expenses such as travel and clothing out of pocket.
He also said the Sheehans should be aware that their two college funds contain some of the same stocks.
``Most people buy mutual funds to help them diversify without ever really knowing what they own,'' he said. ``This `overlap' can be great when the individual stocks are performing well, which they have. However, it can cut deeply if these favored sectors ever fall out of favor.''
Emerick said there is no right answer to the Sheehans' question about living trusts.
Some people think living trusts help avoid the hassle and expense of probate, he said. Others argue that the costs and paperwork in Texas are minimal because of how the law is structured in this state.
One thing is for sure, he said. If the Sheehans plan to retire outside of Texas, they should ask about laws regarding probate in their new state.
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, Texas 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