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Originally published Saturday, May 8, 2010 at 10:00 PM

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Money Makeover

Financial makeover: Laid-off accountant counting on new plan

A financial planner helps a 65-year-old woman who wasn't ready to retire answer tough questions about her future.

Special to The Seattle Times

Would you like some free financial planning?

IF YOU WOULD BE INTERESTED in a free financial makeover in exchange for having your story and photo published in The Seattle Times, answer a few brief questions.

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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Behind every unemployment statistic is a story, and M. Sloan's is all too common.

After putting in 20 years with a Seattle-area manufacturing company and working her way up to a senior accountant position with a salary of $60,000, Sloan was let go last September as part of a reduction in force.

The company gave her 16 weeks of severance pay. She put that money in the bank and began using her weekly $566 unemployment check for living expenses, all the while searching for a new job.

"There is nothing out there for a 65-year-old accountant right now," said Sloan, who has years of experience, but no college degree. "There's so much competition with people with degrees that I'm getting no responses."

Sloan is planning to take a tax-preparation course to make herself more marketable.

Financially responsible

Fortunately, Sloan had always lived within her means. The $130,000 mortgage balance for the home she's lived in for 16 years, which Sloan estimates is worth about $350,000, represents her only debt.

She tries not to use credit cards, but if she does, she says she always pays the balance in full each month. If she was cost-conscious before, Sloan, who is single, says she's drastically cut her budget since she was laid off.

Another positive is the relief of not working 10- and 12-hour days, which has given her more time to plan — and eat — better meals to control her diabetes, to take long walks and to learn bridge at the local community center.

"I did not know I was so burnt out," Sloan said, adding that her children — a son nearby and a daughter in Bellingham — have since told her they'd been worried about the effects of her workload.

Still, her finances have been weighing heavily on her. When the stock market plunged, Sloan shifted her 401(k) away from equities, essentially locking in a balance of around $100,000.

With about $20,000 in liquid assets and her unemployment benefits scheduled to run out in early September, Sloan is grappling with major decisions.

Sloan said she could begin taking her full Social Security benefit in June, calculating she would receive about $1,800 a month.

Or she recently discovered that her lower income made her eligible for an ex-spouse Social Security benefit of $795 a month. Which, if any, should she take?

Despite a stellar credit score, she was rejected for the federal Home Affordable Modification Program (HAMP), which she said would have lowered her $1,134 monthly mortgage payment to about $800.

"Eventually, I will need to use my savings to make the (mortgage) payments," Sloan said.

Uncertain whether she can afford to stay in her home long term, Sloan considered putting it on the market this spring. But then what? A manufactured home or 55+ condo in the Bellingham area near her daughter would cost about the same as the equity she has in her current home, she figured.

And if she did buy something, should she pay for it upfront or try to finance part of it? Or should she rent in the Seattle area and stay closer to her son and her three siblings?

With so many questions and no easy answers, Sloan volunteered for a financial makeover with Matt McKellar, the president and co-founder of Icon Consulting in Bellevue and a member of the Financial Planning Association — Puget Sound Chapter.

McKellar, whose firm specializes in retirement-income distribution strategies and analysis, said that based on Sloan's initial financial details, he found himself starting to worry for her.

"She did everything she could possibly do to raise her kids and be financially stable," McKellar said of Sloan. "She saved for her own retirement. She bought a home and built equity and made the right types of decisions. She was fiscally responsible."

But McKellar said Sloan couldn't control the fact that both the economy and her company had a downshift.

Good habits not enough

"The reality of the situation is that her good financial habits just couldn't create enough extra resources to allow her to live comfortably without an income at this stage of her life," McKellar said.

In order to determine what financial choices Sloan should make and when, McKellar created a base financial plan for her, assuming she would live to 90, would continue to be unemployed and would take her full Social Security benefit beginning in June, when she turns 66. To be conservative, he used a current home value of $290,000 and assumed she would not have a part- or full-time job.

Then he ran almost a dozen scenarios, changing variables such as the timing of getting Social Security benefits, when to use her retirement account and keeping or selling her home.

"It is important to note here that most people are unaware of the impact of timing their Social Security decisions," McKellar said. "It can mean ... hundreds of thousands of dollars of additional plan resources for them," McKellar said.

"It comes down to the plan specifics, but I have seen situations where each of the three decisions (early, normal and late) created the optimal plan."

In Sloan's case, to McKellar's pleasant surprise, delaying her full Social Security benefit until she's 70 — and receiving the lower ex-spouse benefit until then — means an increase in her net present value of about $100,000, according to McKellar's calculations, and makes staying in her home more doable. This is because her benefit at that time will be about $2,400 a month vs. $1,800 should she take the full benefit in June.

If she does defer her full benefit, Sloan will need to live off more of her current resources to bridge the gap for the next four years, McKellar wrote in her plan. But this will be a net positive to Sloan because the rate of return she could have earned on those resources pales in comparison to the returns internally generated by the Social Security system.

A better position

"It will take her a few years to reach the break-even point on this decision (approximately 10), but for every month she lives past age 76, she will be in a better position financially," McKellar wrote.

This would also give her more wiggle room to stay in her home longer. Besides being able to enjoy her garden and the effort she's put into the house over the years, keeping it has a number of positives.

For one, her mortgage will remain the same — or lower, if she becomes eligible for government mortgage-relief programs — whereas her rent costs could increase over time.

There are tax benefits of owning a home, and next year, she will likely meet the income requirements for property-tax relief from King County.

Also, she won't be faced with the costs of selling her home, such as documentation fees and real-estate commissions.

Finally, keeping her home means she also hangs on to the equity she's built up, which she could potentially tap into via a home-equity line of credit or a reverse mortgage.

McKellar also suggested programs Sloan may qualify for with her lower income, including a discount on utilities and a Medicare and Social Security program in which individuals can be eligible for up to 75 percent reimbursement of their out-of-pocket medical and prescription costs that are not covered by Medicare.

For her part, Sloan says McKellar drove home the point with her that what she does now is the most important part of her retirement program.

"If I make a mistake now, with my limited assets, that can make or break me," Sloan said.

McKellar will be spending more time with Sloan, working on what he calls staging her retirement assets in seven-year increments.

As a rule of thumb, he said assets needed in the first seven years of retirement can't have any risk and should just keep pace with inflation.

Second-stage assets for years eight through 14, McKellar says, should be made up of investments that outpace inflation by a bit, like fixed-rate contracts and a laddered bond portfolio.

The third stage can be a little more aggressive and include stocks, futures and commodities.

Sloan said she has received great advice from McKellar, and something else she didn't expect — hope.

"I was amazed, absolutely amazed, that it actually can work, because I felt really, really frightened," Sloan said.

"And by seeing how it can be worked, as long as I stick to a budget and do what we've described, there is a lot of hope. There's hope that I can leave something for my kids and I didn't think would happen."

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