Scrambling for a Last-Minute Nest Egg

If resiliency were an asset, Diane Bair would be rich.

“Change is constant and you’ve got to roll with it,” said Bair, 60, reflecting on a life colored by its share of reversals as well as rewards.

“Of course,” she continued, “when you’re 18, 19, 20, whatever, you’ve got life planned and it’s gonna work this way, blah blah blah, and then it doesn’t. . . .”

When life brought her things she wanted as well as things she didn’t--marriage and divorce, children and single motherhood, a promotion and job uncertainty--she was able to draw on her emotional reserves and deal with them.

If today her income and assets are rather modest, she takes satisfaction in finally having a job that really suits her. Since October, she has been working as an assessment technician for Merced County’s Private Industry Training Department, which places unemployed Central Valley residents in jobs or training programs, depending on their skills, education and other factors. At $24,300 a year, it pays better than the county job she was downsized out of last summer. Better yet, it’s a job that also offers opportunity for advancement.

She bought her Merced home in 1993 with the proceeds of a divorce settlement. Her mortgage costs her a manageable $575 a month. Her 11-year-old minivan is paid for, and she keeps the credit cards under tight control, rarely running a balance. Her only other debt is a $5,000 home improvement loan that she has 30 years to repay.

She has a son and daughter, ages 31 and 29, who are well-established on their own, and her daughter has blessed her with two grandchildren, ages 3 and 8.

‘Time to Panic’ About Retirement

She enjoys good health and keeps busy with a variety of interests, from volunteer work for Habitat for Humanity or her grandson’s elementary school class to crafts such as woodworking, sewing and making cards and memory books.

But with retirement age just five years away, “it’s time to panic,” Bair said. As it stands now, her gross monthly retirement income would consist of the roughly $800 she’d get in Social Security and the $925 or so from her lifetime Public Employees’ Retirement System pension, assuming she retires completely at age 65.

She’s been saving $100 a month pretty regularly of late, but realizes that the $11,000 she’s put aside so far is more a fund for immediate needs than a nest egg.

At the urging of a relative, she took her first, tentative steps into investing last spring, starting to read magazines on the subject, opening a Roth IRA and making her maiden stock-market move: putting $5,000 into Vanguard Index 500 (five-year average annual return: 24.6%), a mutual fund that holds the stocks in the blue-chip Standard & Poor’s 500 index.

It wasn’t long before the market tested her courage, but Bair sat tight. Going through the first downturn is scary, she said, “but when it happens the next time, you think: ‘Eh, no problem. It will go back up.’ ”

Although Bair has long been eligible to participate in Merced County’s deferred-compensation program, she hasn’t taken the opportunity, saying the idea made her uncomfortable. “You get X number of dollars deducted and you can’t touch it till you quit working for the county. That scared me. It’s like, where does my money go? To Never-Never Land? It was a control issue, I’m sure.”

But, said fee-only financial planner Judith Martindale of San Luis Obispo, any money Bair puts into the tax-deferred retirement plan in the next five years could make a substantial difference in what she’ll have to live on later.

Martindale laid out three scenarios:

If Bair works until age 65 at her current salary and invests $100 a month, every month, for retirement, she could have an annual after-tax retirement income until age 90 of about $17,600, or just slightly above what she takes home today. This scenario and the others assume average annual earnings of 8% on Bair’s retirement savings. Although that income comes close to her current take-home earnings, it leaves no room for extra expenses or emergencies.

But if Bair can come up with a way to earn an extra $300 a month for the next five years, Martindale said, she could increase her retirement income to $18,700.

Deferred Compensation

This is how that would work: Bair wouldn’t put the $300 directly into savings. Rather, she would use it to offset having $300 deducted before taxes from her paycheck to go into the deferred-compensation plan, where her savings would grow faster on a tax-deferred basis. That way, she’d reap tax benefits from the extra money. The $100 a month she is currently putting into a bank account or other investments would also go into the deferred-comp plan.

Of the plan choices available, Martindale recommended a somewhat aggressive allocation of 75% in SEI S&P; Index A (a new fund following the S&P; 500 index) and 25% in American Funds’ more stable Bond Fund of America (five-year average annual return: 6.3%). Once Bair retires, she would withdraw the deferred-comp money, roll it over into an individual retirement account, then decide how to invest it for maximum growth and income potential.

Martindale suggested that one way Bair might bring in that extra $300 a month is by making a business of her love of crafts, perhaps by leading card-making or T-shirt-decoration activities at children’s birthday celebrations or teens’ slumber parties.

Bair has often thought about making money with crafts--she regularly sells her wares at regional shows--but her practical side has kept her from leaping into such a project. Craft work is time-consuming, and she wants to make sure an idea will pay off before she devotes herself to it. She hadn’t seriously considered the party idea, though, and she said she’ll be giving it more thought.

Bair could also take a part-time job, Martindale said, perhaps in a crafts or fabric store, which Bair did over a six-year period through last October. Bair enjoyed the work and said she’d certainly entertain the idea of going back to it. Or perhaps a combination of part-time job and selling crafts would do the trick, Martindale said.

Bair has also thought of working--perhaps for the Private Industry Training Department, perhaps as a teacher’s aide--at least part time beyond 65. Martindale supported that scenario too, pointing out that the longer Bair can go before she has to start drawing on her savings, the better.

For instance, if Bair continues working full time at her current job until age 67 and brings home an extra $300 a month from other work, she could have about $19,400 a year to live on in retirement, Martindale said.

Hang On to Car as Long as Possible

There’s a big worry, though: Bair’s automobile. “I’ve taken really good care of it, but there’s a limit,” she acknowledged. Martindale advised that Bair hang on to it as long as feasible, then tap her non-retirement savings to buy a used car.

Whatever Bair ultimately decides about her retirement, it’s clear that money won’t play the most important role.

“I know that I won’t do nothing--not the bathrobe-till-noon thing--I just don’t do that,” she said. “I’m a busy person. I see myself as working in some capacity doing something, having a part-time job, volunteer work, getting out there.”

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This Week’s Make-Over

* Investor: Diane Bair, 60

* Occupation: Assessment technician for government job-training program

* Gross annual income: $24,300

* Financial goals: Save for retirement

Current Portfolio

* Real estate: Merced home bought for $87,000 in 1993. Bair owes about $62,000 on a fixed-rate, 7.5%, 30-year mortgage.

* Retirement accounts: $2,000 in a Roth IRA, invested in Vanguard Index 500 fund

n*Mutual funds: $3,000, also in Vanguard Index 500

* Cash: $6,100 total in credit union savings, certificates of deposit and money market accounts

* Debts: $5,000 home improvement loan

Recommendations

* To maximize the income she’ll have available in retirement, Bair should try to add $300 a month to the $100 a month she is already saving. The entire amount should be invested in her employer’s tax-advantaged deferred-compensation plan. Seventy-five percent of that should be invested in a blue-chip growth mutual fund, and the rest should go into a bond or other fixed-income fund.

* To come up with the extra $300, Bair can take a part-time second job or try making her love of crafts pay off in a sideline such as providing entertainment at youngsters’ parties.

* Continue to work at least part time past age 65 to put off drawing down assets for as long as possible.

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Meet the Planner

Judith Martindale is a fee-only certified financial planner and enrolled agent in San Luis Obispo who provides planning for middle-income clients nationwide. She is the coauthor of the books “Creating Your Own Future: A Woman’s Guide to Retirement Planning” and “52 Simple Ways to Manage Your Money.”