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Making the nest egg last

Save as much as you can and invest more aggressively, a financial planner counsels a Dunedin grandmother after poring over her finances.

By HELEN HUNTLEY

© St. Petersburg Times, published February 18, 2001


When she looks at her financial future, Jane Lukowski sees a lot to worry about. At 65, she frets about the adequacy of her savings and the return she earns on her investments. She fears being forced into retirement before she can afford it and wonders how she will provide for the 11-year-old granddaughter she is bringing up on her own.

"In the next five to six years, my boss may retire and I will most likely be unemployed, as I cannot see anyone hiring a 70-year-old lady," she said.

Lukowski of Dunedin faces some big challenges, but by acting now she can improve her financial future, financial planner David J. Lough said.

"She needs to save as much as she can, and she needs to earn a better rate of return than the 6 percent she was earning or she may run out of funds before her life expectancy of 87," he said.

Lough, who heads Lough Investment Advisory of Clearwater, took a look at Lukowski's finances at the request of the St. Petersburg Times. He met with her and prepared a financial plan, parts of which she has begun to implement.

In some respects, Lukowski has much in common with millions of older women. She has modest savings of about $87,000, no pension and a relatively small Social Security benefit of $527 a month. Fearful of risk, she has shied away from stocks and relied on income investments such as bank CDs, money market funds and a fixed annuity.

"Many older women go what they think is the safe route, but they don't realize that the combination of taxes and inflation is going to eat up most of their return," Lough said. "On a real basis, they don't get ahead of inflation."

He recommends that Lukowski move money gradually from income investments to mutual funds that invest in stocks or a mixture of stocks and bonds. Eventually he would like her to end up with 30 percent of her savings in combination growth and income funds, 25 percent in income funds, 25 percent in growth funds and 20 percent in cash.

He suggests that Lukowski move her CD money to the Vanguard mutual fund group, keeping 30 percent in a money market fund for emergencies, while splitting the rest between the Growth and Income Fund and the Total Bond Market Index. Both those funds have four-star ratings from Morningstar (which provides independent analysis of investments), low expenses and above-average returns.

For her IRA, already in Scudder's money market fund, he suggests moving 40 percent to Scudder's Growth and Income and 30 percent to the company's Greater Europe Fund, which he likes for its five-star Morningstar rating and its 28 percent average return over the past five years.

Lough says he suggests keeping the money at Scudder for the short term as a matter of convenience. But with Scudder adding sales charges to its funds, he recommends eventually moving the money to the better-performing Janus fund family.

Lukowski says she never invested in stocks because she knew nothing about them.

"I didn't have a clue," she said. Lukowski says she was reluctant to go to a financial adviser after hearing scary stories about other people's bad experiences.

"I didn't want to give up control to someone I didn't know," she said.

But after meeting with Lough, she began exploring mutual fund investments and bought a copy of Money magazine to learn more.

Lough says that by allocating a big chunk of her money to stocks, Lukowski should be able to improve her overall investment return to 8 percent, which is critical to making her money last.

But 8 percent returns are not guaranteed. Lough's projections show that based on historical returns, there still is a better-than-even chance that Lukowski could run out of money before age 87, even if she saves the $3,840 a year he recommends as a minimum. Lough says it is critical for Lukowski to save aggressively over the next few years.

Her financial picture is complicated by three factors:

She is the guardian for her granddaughter, Bethany, who has been in her care since infancy. The state helps out with $2,160 a year in aid for dependent children and Bethany qualifies for Medicaid, but Lukowski pays most of the fifth-grader's expenses. Her largest debt is the $2,400 she owes Bethany's orthodontist.

Currently, Lukowski lives in her home rent-free under a recent divorce decree. When that arrangement ends in five years, Lukowski's costs will increase substantially. That makes it more important for her to save money now while she has the opportunity.

Her earnings are well below her potential. Although she is a registered nurse, Lukowski works as a receptionist in a doctor's office, earning $11 an hour for 35 hours a week. Her employer also pays for her Medicare supplement.

"She's underemployed," Lough said. "She likes her job, but it's costing her something."

Lukowski says she knows she could earn more in nursing but is reluctant to return to the high-stress field. She says she also would have to take a refresher course to qualify for many nursing jobs.

"Maybe when Bethany gets older and she has a part-time job, I might work some of the weekends in private duty care," she said.

Lough also told Lukowski she cannot afford to save for Bethany's college education.

"The real issue is funding her retirement; that needs to come first," he said. "If we can help Bethany any more, that would be wonderful, but that's the icing on the cake."

Lukowski already has purchased a Florida Prepaid College plan for Bethany. That plan will cover only a small part of her costs, but Bethany might be able to cover the rest through financial aid, her own earnings and possibly gifts from other relatives.

Because Bethany depends on her, Lukowski needs to buy life insurance and, if she can get it through a group plan, disability insurance, Lough said. He also recommended that she have a simple will prepared and name a guardian for her granddaughter.

But Lough gave a thumbs-down signal when Lukowski told him she was interested in buying a house when her free-rent arrangement ends.

"It would take a big chunk of money out of her retirement funds for a down payment, so it would hurt her ability to build her retirement funds and make her more illiquid," he said. "And she isn't going to get much of a tax advantage."

Lukowski says she is excited about the idea of investing in mutual funds and improving her financial security.

"Now I'm not so worried and fearful," she said.

But she says she also realizes that retirement is not a realistic option any time soon.

"I'm healthy," she said. "I think I will just keep on working."

A recipe for higher return?

Jane Lukowski has followed a conservative strategy, keeping her money in CDs, money market funds and an annuity. Financial planner David Lough suggests gradually moving most of the money to investments with the potential to generate a higher return. He wants her to move slowly so she has time to learn about investments and get comfortable with risk. As a long-term goal, he suggests an allocation of 25 percent to growth funds, 25 percent to income funds, 30 percent to combination growth and income funds and 20 percent to cash.

Current investments

Certificates of deposit $35,253

Scudder Money Market Fund $39,000

Annuity $9,067

Checking account $3,500

U.S. savings bonds $450

TOTAL $87,270

Recommended investments

Vanguard Money Market Fund $10,576

Vanguard Total Bond Market Fund $14,101

Vanguard Growth & Income Fund $10,576

Scudder Growth & Income Fund $15,600

Scudder Greater Europe Growth Fund $11,700

Scudder Money Market Fund $11,700

Annuity $9,067

Checking account $3,500

U.S. savings bonds $450

TOTAL $87,270

Budget breakdown

Here's a look at annual income and expenses for Jane Lukowski and her granddaughter, Bethany.The expense side includes the $3,840 a year that financial planner David Lough suggested as a minimum savings goal.

Income

Wages $17,228

Social Security $6,324

State aid $2,160

TOTAL $25,712

Expenses

Groceries $4,800

Housing* $3,994

Savings $3,840

Car $3,558

Child care/school expenses $2,850

Medical care $2,500

Taxes $1,318

Gifts & charity $1,300

Other $1,552

TOTAL $25,712

* Utilities, maintenance and insurance only

About the financial planner

David J. Lough owns Lough Investment Advisory of Clearwater, a fee-only tax and financial planning service affiliated with Cambridge Advisors. He formerly was executive vice president and chief financial officer of Operation PAR, a Pinellas County drug treatment program. Lough is a certified public accountant, a certified financial planner and a member of the National Association of Personal Financial Advisors. He has an MBA from Wright State University in Dayton, Ohio, and teaches managerial finance as an adjunct faculty member at Saint Leo University.

Share your story

Today's "Real People, Real Money" report is the first in an occasional series of articles about Tampa Bay area people and their money. We hope to feature people of varying financial circumstances. If you are profiled, you will receive a free financial plan. If you are willing to talk about your finances, or if you are a financial planner interested in participating, please contact Helen Huntley by e-mail at huntley@sptimes.com or by telephone at (727) 893-8230.

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