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Originally published Sunday, June 7, 2009 at 12:00 AM

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Money Makeover

Stock-market plunge rattled Seattle couple's retirement plan

A Seattle couple's retirement plans were rocked by the stock-market crash, but a financial planner — who gave them some detailed advice — says their lack of debt and good saving habits have left them in good shape.

Special to The Seattle Times

About this series

This is the latest in a series of monthly "financial makeovers" by The Seattle Times for readers who want to get real about their money.

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If you would be interestedI in a free financial makeover in exchange for having your story and photo published in The Times, answer a few brief questions at seattletimes.com/yourmoneysurvey.

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When Doug Loudon joined his wife, Judy, in retirement nearly two years ago, they thought they were set.

Rigorous saving over the past 20 years had built a sufficient nest egg in the high six figures.

The couple were debt-free after paying off the balance of the mortgage on their Seattle home with some of the proceeds of an annuity Judy inherited from her stepmother.

Then came the recession and big losses in the stock market.

Last year, Judy pulled the plug on some of their equity holdings after watching the value of their stocks decline.

"About nine months ago, I bailed out and invested some of (Doug's) retirement money in CDs," Judy said in April.

Though cash feels like the safest choice, the Loudons are uncertain where they stand. Do they have enough to last? Could they afford the used motor home they were eyeing as a means to visit their children and grandchildren living throughout the West?

"Now we don't know how to manage with what's left," Doug Loudon, 70, lamented.

To help get a clearer picture of their options, the Loudons met with Chris Rasmussen, a financial consultant at RBC Wealth Management in Seattle.

Judy Loudon said that gathering all the information about their expenses and retirement income for the meeting with Rasmussen was a job she should have done a long time ago.

"I saw the handwriting on the wall," Judy said about the imbalance between the incoming and outgoing money.

Rasmussen, a member of the Financial Planning Association — Puget Sound Chapter, told the couple they did a wonderful job saving for retirement. Their lack of debt, he said, gives them flexibility to spend while in retirement.

"They both maxed out their retirement plans when possible and have done so on an average income," Rasmussen wrote.

That income came from Doug's tenure in sales for a steel company and Judy's 35-year career as a teaching assistant. Rasmussen estimates that the Loudons' current retirement income will be about $38,000 a year, the bulk of it from Social Security with a remaining $3,700 from Judy's pension and about $1,400 in dividends.

This doesn't cover their estimated annual living expenses — including taxes — of about $61,000, a negative cash flow that Rasmussen identified as a weak spot.

Another weakness he cited was their holdings in penny stocks (generally referred to as stocks that trade for less than $1 a share), which is where the Loudons have 9 percent of their investments. Rasmussen advised them to liquidate the penny stocks immediately for a tax loss to limit their risks.

"Although penny stocks in some cases can achieve big gains, most of the time they become worthless," Rasmussen wrote in his recommendations.

With nearly 60 percent of their portfolio in cash, Rasmussen suggested that the Loudons reallocate to a "moderate-conservative position" to increase the income generated within their accounts and to keep up with inflation.

"With the recent recession, bond prices and equities in many asset classes have fallen in value," Rasmussen said, making the time right to move some of the CDs and money-market funds back into stocks and bonds using a dollar-cost averaging approach.

To simplify keeping track of their retirement funds, the planner advised the Loudons to consolidate their accounts where possible.

Doug has traditional and Roth IRAs with both Vanguard and TD Ameritrade, while Judy's SERS (School Employees' Retirement System) account could be directly rolled over into her traditional IRA.

Lumping it together would make it easier to implement one allocation strategy and simplify rebalancing, Rasmussen says.

The couple's allocation, he said, should look more like this:

Cash: 7 percent instead of 59 percent; U.S. bonds — a mix of corporate bonds and agency-backed bonds (Ginnie Mae and Fannie Mae): 45 percent; international bonds: 20 percent; large growth stocks: 5 percent instead of 18 percent; large value stocks: 6 percent; mid-value stocks: 3 percent; small value stocks: 1 percent; international stocks: 5 percent; gold: 3 percent; commodities: 3 percent; real estate: 2 percent.

This new portfolio would generate an estimated $46,000 a year in interest and dividends, Rasmussen said in the plan, and the Loudons should withdraw a maximum of 4 percent — or about $38,000 — from their total portfolio value annually.

"To be safe, I would encourage taking less if possible," Rasmussen wrote. "This will also give the markets more time to recover."

The extra cash flow should be used to purchase long-term care insurance for Judy, Rasmussen added.

"If either of them at some point went into a nursing home, this could be a significant drain on their retirement assets," he wrote.

Seattle's average cost per year in a nursing home is $93,000, he said. For Judy's age — 68 — he estimated a long-term care policy would cost around $5,000. Doug, who had juvenile diabetes, is likely unable to qualify for a policy.

As for the motor home, Rasmussen suggests the Loudons sell an Eastern Washington vacation property they haven't utilized in several years. This would save about $800 a year in expenses and taxes and net about $40,000, a big chunk of the $50,000 or $60,000 the Loudons expect to spend on the RV they've always wanted.

"I do need to sell (the property)," Judy agreed. "It's got a disintegrated trailer sitting on it and I can't find anyone willing to get rid of the trailer. It's sticky and complicated."

As for the rest of Rasmussen's advice, Judy says they are still trying to digest all the good information he was able to provide and recover from the rude awakening that they may need to delay the motor-home purchase.

"I thought that I had plenty [of savings] that I could [buy it] and not bat an eye over it," Judy said. "But apparently I do not, so I have to sit tight until I can figure it out."

She said the Loudons need to give more thought to moving their cash into bonds and selling the penny stock in a company they still believe in.

"I don't feel comfortable with anything right now because of the way the whole economy is," Judy said. "Nothing feels good to me."

Copyright © 2009 The Seattle Times Company

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