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Monday, Oct. 5, 1998
Income sought for retirement
Couple wants to maximize investments to maintain standard of living
By JEFFREY TOMICH
Staff WriterArthur and Ginger Pavlovsky are quickly approaching retirement and seek to squeeze as much income as possible from their investments in order to maintain their standard of living.
The Pavlovskys (not their real name) live in Corpus Christi and together earn $107,000 a year. With no financial dependents, their annual expenses come to $79,300, led by taxes, charitable donations and IRA contributions.
Both 57 years old, the Pavlovskys plan to retire in three years, although Arthur, who is self-employed, may consider working part-time in order to earn up to an extra $25,000 a year until he qualifies for Social Security benefits.
The couple has more than $500,000 in assets, mostly in IRAs and a money market mutual fund. Their only debt is a $12,000 outstanding balance on their car loan.
The Pavlovskys' biggest financial concern is maximizing their investments to produce income in retirement. Arthur and Ginger both will begin drawing Social Security benefits at age 62.
Specifically, the couple wants to know how much investment capital is needed and where it should be invested to produce $50,000 in post-retirement income. They're also curious how much Social Security income to expect and whether those benefits will be affected by their investment income.
John A. Seaman, a certified financial planner with Seaman Financial Services, said the Pavlovskys' budget is exceptionally well-planned.
``All of their expenses seem to be very realistic and definitely in line with norms,'' he said. ``The only item in their budget that looks way out of line is their health insurance cost after retirement.
Seaman projects that the Pavlovskys' medical insurance costs will rise about 8 percent to 12 percent a year. ``Therefore, their figure, on average, is still a little high.''
Arthur Pavlovsky estimated his family's post-retirement health insurance costs at $7,500 a year. Instead, the annual figure should be closer to $4,200, or about $350 per month, Seaman said.
That amount should be budgeted until the couple is eligible for Medicare at age 65 when their health insurance costs, including Medicare premiums, should drop to about $130 to $150 per month, or $3,600 per year, Seaman said. Expenses would be less if they chose a health maintenance organization.
Therefore, he said, the Pavlovskys' biggest challenge in planning for health coverage will be for the period between the ages of 60, when they plan to retire, and 65, when they qualify for Medicare.
Seaman said investment income generally doesn't affect Social Security benefits, but earned income does. Benefits are reduced by $1 for each $3 earned over a certain amount. That amount is $9,120 for individuals under age 65 and $14,000 for those between 65 and 69. There is no earnings ceiling for taxpayers over 70.
For married couples filing a joint tax return, Social Security becomes taxable at $32,000, he said. So the Pavlovskys don't have to worry about how much their Social Security benefits are reduced, only how much they're taxed.
Adjusted gross income is used to determine if Social Security benefits are taxable. Half of an individual's Social Security benefits are taxable at his or her regular income tax rate if the individual's adjusted gross income is more than $50,000.
Seaman estimates that Arthur's Social Security benefits will be about $1,100 a month at age 62 and $1,400 at 65. He estimates that Ginger's monthly benefits will be about $670 at 62 and grow to $777 by age 65.
For exact projections, he suggests that the Pavlovskys write or call the Social Security Administration.
The Pavlovskys now have $400,000 worth of investable assets, but realistically need closer to $600,000 or $700,000 to generate $50,000 in annual income after retirement, Seaman said. They could do it with less, but it would be risky to depend on a 9 percent rate of return for 20 years or more.
``This means you have to increase your savings as much as possible between now and age 60,'' he said. ``You need to manage your portfolio while still maintaining your principal intact. It looks like you have been accomplishing this so far, but you do need some additional portfolio management ideas.''
As a person's retirement approaches, his or her portfolio should become increasingly conservative, Seaman said.
``It appears that they have a conflict here with a need to be more aggressive to obtain the total investment dollars they need, while at the same time slowly converting their portfolio to more conservative interest-bearing, income-producing investments.''
Seaman said a high-yield bond fund can yield about 9 percent, but the Pavlovskys would be taking a considerable amount of risk.
Other investments might include callable CDs with returns in the 6.5 percent to 7 percent range; GNMAs and FNMAs, mortgage-backed bonds with returns in the 7 percent to 7.5 percent range; and index annuities that preserve principal with growth tied to the S&P 500 Index.
To figure benefits:
For Social Security benefit projections, you can write to: Social Security Administration Office of Public Inquiries, 6401 Security Blvd., Room 4-C-5 Annex, Baltimore, Md. 21235; call (800) 772-1213; or visit their Web site at www.ssa.gov
Investment income:
To generate $50,000 of annual income you need to have the following amounts of principal:
Interest rate, Principal required
10%, $500,000
9%, $555,555
8%, $625,000
7%, $714,285
6%, $833,333
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