On a Path Leading to Greater Security

Joyce Taylor has a simple philosophy of life: Play the hand you’re dealt, and don’t lament too much when you get a bum deal. That’s kept her going through what many would consider serious hardships.

Taylor, now 63, was widowed in her late 30s and reared her two children alone. She remarried in the early ‘80s and started a business repairing boat engines. But eventually the marriage failed and she folded the business. As part of the divorce settlement, Taylor had to pay alimony to her ex-husband. Later, she went to work for a bank that was shut down by regulators only a month after she got there.

But after each setback, Taylor, who now works as a secretary in the Orange County district attorney’s office, picked herself up and trudged on, ready to accept the next challenge life threw at her.

And when it comes to money, Taylor has stuck to a steady path.

“I’ve always been a conservative person when it comes to money,” she said. “I don’t like taking too many chances--especially not now.”

Her investment portfolio is made up of low-risk bond funds and bank certificates of deposit. Although these investments have kept her from losing principal, they’ve also depressed her average annual returns. In particular, she’s missed the strong bull market in stocks of the last several years.

Taylor will have to embrace some change to her investment portfolio if she wants to maintain her current modest but comfortable lifestyle in retirement, says Karen C. Altfest, a fee-only certified financial planner based in New York City who reviewed Taylor’s financial situation.

“I think she’s doing really well because she’s living fairly modestly and within her means,” Altfest says of Taylor, “but she needs to consider new ways to invest what she has.”

Although Taylor has never earned a lot--she currently makes just over $31,000 annually--she has assembled a nest egg of roughly $100,000 mainly by being frugal.

She clips coupons and shops for bargains. Though she admits to being a hopeless clotheshorse, she won’t buy anything that isn’t on sale. She seldom charges more than $100 on her credit card, and she always pays off the balance each month. And for the last four years, she’s been paying $200 to $400 a month beyond the required payment of $357 for the mortgage on her condominium in Leisure World in Laguna Hills. She now owes about $40,000 on the mortgage.

In addition, 10% of her $31,560 annual gross salary goes directly into a pension fund at work.

Although those habits are great, her investments are far too conservative, Altfest says. With her money largely tied up in bond funds with single-digit average annual returns, Taylor’s money isn’t working a fraction as hard as she is. But if she revamps her portfolio, putting her money into a diversified mix of stocks, fixed-income securities and foreign investments, she should be able to significantly boost her returns yet still maintain a modicum of security in regard to her principal, Altfest says.

The fact that Taylor’s investments aren’t wisely allocated doesn’t come as a shock. Most of her investment advice has come from friends or employees of her bank. The rest she’s learned by the seat of her pants.

“I still feel like I’m such a novice and I need to learn so much,” she said. “The scary part is that I’m not knowledgeable enough to know how to make the best of the money that I have.”

Taylor first started pondering the matter of investing soon after her first husband died in 1973. She was 39 with an 11-year-old son, a daughter in college and a new house in Garden Grove. She received about $65,000 from her husband’s life insurance policy. Taylor used a small portion of the money to pay off that mortgage and put the rest into bank CDs until 1985, when a friend from her boating club suggested that she try “the market.”

She put some money into a Colonial government-bond fund, which paid regular interest that she used to help handle day-to-day expenses. That year she also sold her house and used the money to buy a boat, where she lived with her second husband until their divorce in 1992.

At that point, the $421 in interest Taylor was receiving from her bond fund investment helped cover her four-year alimony obligation to her ex-husband.

Taylor sold the boat in 1992, bought the condo in Leisure World and started making some decisions about her future. She hadn’t considered retirement before then and had no money put aside for it. In 1993, when she got her job with the D.A.’s office, she opened an individual retirement account, now invested in a Kemper Horizon balanced fund, which invests in a mix of stocks and bonds. The IRA is now worth about $14,000.

Taylor should be able to retire in six or seven years, Altfest said. Making the new investments now should provide her with the $2,000 a month she hopes to live on and she should have enough money well into her 90s, said Altfest, who specializes in investments for women.

First, Altfest said, Taylor should work at her current job at least six more years, at which time she will be vested in the pension plan. Once she retires, she’ll receive a pension of about $700 a month. But Taylor said she wants to work even longer, until she’s 72.

“As long as I’m healthy, I’ll continue working,” she said. “Right now, I’m excited by the challenge in my everyday environment. I enjoy working, and I’ll probably keep doing it until I can’t anymore.”

Altfest says working longer would be great if Taylor wants to do that but that her pension payment won’t increase with the additional years of work. Besides, at age 70, Taylor can begin receiving monthly Social Security checks of about $700 or more, which, with the pension, should give her an adequate income to live on without wages. Investment income would bring her close to the goal of $2,000 a month.

Still, the matter of additional income is important to Taylor, an active and very independent woman who power walks three miles a day and is adamant that her children will not have to support her.

Given Taylor’s age, her assets and her low tolerance for risk, Altfest, in making recommendations for new investments, advised a relatively conservative portfolio.

Taylor now has about $80,000 tied up in Colonial Federal Securities A. Altfest told Taylor to sell that fund and divide the proceeds as follows:

About $10,000 should be invested in Neuberger & Berman Partners Fund, a no-load growth stock fund (five-year average annual return: 18.31%). “Partners fund” means the firm’s partners invest their own money in the fund, an idea Altfest said she likes.

Another $10,000 should be placed in Yacktman Fund, another no-load growth stock fund, which is less than 5 years old. About $40,000 should be evenly divided between two Vanguard funds: Fixed Income Intermediate-Term Corporate Bond, which is less than 5 years old, and Fixed Income GNMA (five-year average annual return: 6.9%), which invests in government-backed mortgages.

Since Taylor’s pension income will remain fixed--that is, it won’t go up with inflation over the years--Altfest recommended that the remaining $20,000 be placed in Treasury inflation-indexed bonds, which provide a return that’s tied to the consumer price index, the chief measure of inflation. These securities currently yield about 3.5% above that.

The $14,000 in Taylor’s IRA should be split between two stock mutual funds, one an international fund, the other a growth and income fund. She suggests, respectively, Tweedy, Browne Global Value, which is less than 5 years old, and Vanguard Windsor II (five-year average annual return: 18.4%).

Taylor should also reduce her cash reserve, currently about $21,000 in two CDs, to about $10,000--a more than adequate emergency fund for Taylor. Some of the cash she moves out the CDs when they mature should be invested in the Neuberger or Yacktman fund, and some should be used to pay down her car loan.

Taylor bought a new car in March after her previous one was destroyed in a traffic accident. The $12,000 loan bears a 9.5% interest rate and requires a $271 monthly payment.

“Since you’re only getting about 5% keeping the money in [a] CD, it’s better to use that to get rid of that high-interest debt,” Altfest told Taylor.

Altfest noted, however, that Taylor’s home loan, which bears a 7.6% interest rate, isn’t worth paying off early, since the interest on it is tax-deductible. Instead, Taylor should invest the $200 or more she’s been paying against the mortgage principal to her stock funds.

Last, Altfest strongly advised Taylor to prepare a will.

A lot of people Altfest sees--including young couples with children--don’t have wills and don’t like to dwell on the idea, but it is simply unwise for someone to ignore the need for one, she said. Having an attorney draw up a will can run as little as $200 if you go in knowing what you want, and that simplifies things for people you leave behind, Altfest said. In addition to her two children, Taylor has three grandchildren.

Courts will usually recognize certain types of wills you can do yourself, without an attorney, but those are best used in simple estates. The point is that if someone dies without a will, the estate could be tied up in probate court proceedings for years.

Taylor admitted to being lax about the matter of a will. She’s already given her daughter a medical power of attorney, meaning that Taylor’s daughter will carry out her wishes should her mother fall ill. But Taylor said that since the car accident, she’s been thinking about a will.

“That really brought it to the front of my mind that something can happen at any time,” Taylor said.

However, Taylor was most enthusiastic about Altfest’s investment advice.

“These sound like excellent ideas, and I’m anxious to get things moving,” Taylor said. “This is one of the first times that how my money can work for me makes some sense.”

*

Lucille Renwick is a Times staff writer. She can be reached by e-mail at [email protected]

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This Week’s Make-Over

* Investor: Joyce Taylor

* Age: 63

* Occupation: Secretary, Orange County district attorney’s office

* Gross annual income: $31,560

* Financial goals: To have enough money for a comfortable retirement

*

Current Portfolio

Investments

* $79,053 in Colonial Federal Securities bond fund A

* $13,598 in IRA in a Kemper Horizon balanced fund

Cash

* $21,400 in certificates of deposit

Home

* Condominium with $75,000 in assessed value, with a mortgage of $40,000

*

Recommendations

* Continue to work at her current job until she is vested in the pension plan.

* Pay off most of her $12,600 car loan with money now in a CD. Reduce her cash reserve to $10,000 and put the remaining money in mutual funds.

* Sell her Kemper fund IRA holding and her Colonial bond fund holding and reinvest the money in a diversified portfolio of domestic and international stock funds, fixed-income funds and Treasury inflation-indexed bonds, as suggested below.

* The additional $200 or more currently being paid toward the condo’s mortgage should go into stock mutual funds instead.

* Draw up a will.

*

Recommended Purchases

* Treasury inflation-indexed bonds, available from Federal Reserve in L.A. (213) 624-7398

* Neuberger & Berman Partners Fund (800) 877-9700

* Yacktman Fund (800) 525-8258

* Vanguard Fixed Income GNMA (800) 662-7447

* Vanguard Fixed Income

Intermediate-Term Corporate Bond Fund 800) 662-7447

For IRA

* Tweedy, Browne Global Value (800) 432-4789

* Vanguard Windsor II (800) 662-7447

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MEET THE PLANNER

Karen C. Altfest, a fee-only certified financial planner, is vice president of New York-based L.J. Altfest & Co.

Altfest advises widows and divorced, single and married women in all phases of personal finance planning. She also teaches financial planning for novices and conducts seminars about women and money. She is a board member of the National Assn. of Personal Financial Advisors, Northeast region.