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Money Makeover

Falling interest rates have taken a toll on retired couple’s nest egg

Claudette and Manny Wise rely on monthly checks from funds that specialize in Ginnie Maes, which have been going “down, down, down,’’ Claudette said. Claudette and Manny Wise rely on monthly checks from funds that specialize in Ginnie Maes, which have been going “down, down, down,’’ Claudette said. (Michele Mcdonald for The Boston Globe)
By Lynn Asinof
Globe Correspondent / February 7, 2010

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Claudette and Manny Wise couldn’t be more different in their views about money.

Claudette, 71, likes to follow the markets, having initially learned about investing by watching her father carefully track his stocks and bonds. Manny, 83, and a former band leader and drummer, takes a simpler approach. He’s invested his money in mutual funds that specialize in buying Ginnie Maes - pools of mortgages guaranteed by the Government National Mortgage Association. That investment produces a monthly check Manny puts right in the bank.

“I like getting that check every month,’’ he said.

But the Danvers couple agreed on one thing: Falling interest rates have taken a toll on their retirement income. With money market yields now averaging less than 1 percent and five-year certificates of deposit below 3 percent, their portfolio was throwing off far less income than it used to. “Our Ginnie Mae checks have been going down, down, down every month,’’ Claudette said, noting that their combined Ginnie Mae monthly payout dropped from $1,415 in January 2009 to just $933. “It is getting a little bit tight.’’

Concerned they would soon have to start tapping their principal, Claudette applied for a Boston Globe Money Makeover. Her goal: To make sure that they wouldn’t outlive their money. Manny agreed to go along with the makeover, but made it clear he really didn’t want anyone messing with his Ginnie Maes.

When the two sat down with fee-only financial planner Barbara Nevils of Lynnfield, they found that they were in the enviable position of having lots of options. The couple’s financial needs are relatively modest - just $30,000 a year from their investments to supplement the $20,000 a year provided by Social Security. “If you want $30,000 a year for 30 years, that’s $900,000,’’ said Nevils. “You’ve got that.’’ But not much more.

Given uncertainty about interest rates, volatility of the financial markets, and inflation, Nevils said some careful restructuring would not only secure the couple’s income stream, but also provide for reasonable long-term growth.

What kind of restructuring? Nevils offered four scenarios. One option: to simply take the $14,000 in dividends that is now being reinvested and use those funds to supplement the income provided by Manny’s Ginnie Maes and other sources. That approach, however, could leave the couple a bit short on cash. More important, Nevils said, it doesn’t address some of the structural issues in their portfolio.

The couple’s portfolio consisted of 11 different accounts holding 52 different investments. And since some of those holdings were actually “funds of funds,’’ the total number of investments was even higher. Moreover, all but one of those funds charge fees of 1 percent or higher at a time when index funds typically charge a quarter of that or less.

The second scenario called for the Wises to put their entire portfolio into bonds, either by using a selection of bond mutual funds or by creating a laddered portfolio of individual bonds. Such a portfolio, Nevils said, could be reasonably expected to produce a return of 3 to 3.5 percent a year, providing the couple with income ranging from $27,000 to $31,500, albeit with some market and default risks.

Claudette, however, was far more interested in the third option, which would divide the couple’s assets into three distinct baskets - short-term, midterm, and long-term. The first basket would be funded with $150,000, enough to provide $30,000 a year for five years. It would be invested conservatively in CDs, money market accounts, and perhaps fixed-term annuities.

The second basket of $150,000 - invested in short- to intermediate-term fixed income - would hold assets intended to provide income six to 10 years in the future. Manny’s Ginny Mae funds would fit nicely in this basket, but rather than getting a monthly check, Nevils said, that money would be reinvested.

The remainder of the couple’s assets - roughly $600,000 - would be invested in a balanced portfolio of 60 percent stocks and 40 percent bonds. Every five years, the buckets would be rebalanced, Nevils said, making additional funds available for immediate use.

“I like that,’’ Claudette said, noting that the structure would provide both a steady stream of income and the opportunity for additional portfolio growth.

Still, she was also intrigued by Nevil’s fourth scenario, which relied on immediate fixed annuities to meet some or all of the couple’s annual income needs. After consulting with a registered insurance adviser, Nevils found that $364,000 would buy an immediate fixed annuity with joint survivorship that would provide $30,000 of income per year during the Wises’ lifetimes and was guaranteed to last at least 10 years no matter what their longevity. Under this scenario, the annuity would replace the first two baskets, with the remainder of their assets invested in balanced portfolio just like the third basket.

“You are at a good age to consider one of these,’’ Nevils said, noting that the couple could also scale down the annuity option, buying a smaller annuity that would only cover a portion of their monthly income needs.

But while annuities are easy, they also have some disadvantages, Nevils said. In the current interest rate environment, for example, these annuities offer low rates of return, and they won’t keep pace with inflation unless the couple purchases a more expensive inflation-protected product. Moreover, if the stock market takes another big hit, this approach might actually reduce the value of their portfolio, she said.

When the makeover session ended, the couple was still undecided. “It is a lot to think about,’’ Claudette said, noting that she was torn between the three-basket approach and the annuity. The next step, she said, was to do some research, checking out the pros and cons of each scenario. But no matter which of the two the couple ultimately chooses, one thing is certain: No one will be messing with Manny’s Ginnie Maes.

To be considered for a Money Makeover, fill out the application at the “Your Money’’ section of www.boston.com/business, or call 617-929-2916.

Clarification: In a Money Makeover in Sunday's Money & Careers section, a financial planner recommended that a couple consider investing $150,000 conservatively so as to provide them with $30,000 in each of the next five years. The story did not say that the couple would get their annual $30,000 from the principal, not the return on investments.

Claudette and Manny Wise

Falling interest rates have taken a toll on this Danvers couple’s retirement income, creating worries that they may have to start tapping their principal. Fee-only financial adviser Barbara Nevils recommended that the couple consider several different portfolio scenarios. She also recommended that the Wises:
■Restructure their portfolio to reduce the number of accounts and lower fees by shifting money to index mutual funds and exchange-traded funds.
■Consider making use of dividends now being reinvested if and when they need to increase their annual income.
■Remember that annual distributions of 4 percent from their retirement funds - or $36,000 a year - should be sustainable over the long term, with portfolio growth replacing those assets withdrawn.
■Limit the purchase of annuities from any one provider in order to be fully covered by Massachusetts’ guaranty maximum of $100,000 in present value of annuity benefits.