On eve of retirement

A Michigan couple's portfolio and home are in need of an upgrade

Your Money

October 09, 2005|By JANET KIDD STEWART

Perched on the retirement threshold, Linda and Jim Jeschke have more income than they need and are sitting on some of the fastest-appreciating land in the Midwest.

So why is she so worried?

Skyrocketing property values in their hometown of St. Joseph, Mich., are forming a "golden fence" around their three-apartment residence, roughly valued at $300,000. They could cash out to help finance their retirement years, but then where would they live?

He grew up in the home, so there's a sentimental attachment to it. And the couple owns it free and clear, so they don't worry about a monthly mortgage payment.

But if they stay they'll be on the hook for some much-needed repairs and updating that could eat into their retirement funds. Because of those needed repairs, they aren't collecting as much rental income as some other landlords in the area.

"The income from the two [other] units doesn't cover the taxes, utilities and upkeep," Linda Jeschke, 58, told Money Makeover in requesting some financial advice. "With depreciation, we actually take a loss most years."

That isn't their only problem.

Financial planner Warren McIntyre looked into the Jeschkes' $293,000 nest egg and found some needed repairs there, too.

"Your stock market investments are too aggressive and not well-balanced," said McIntyre, a fee-only planner in Troy, Mich. They have too much invested in large growth stocks, particularly health care and information technology companies, he said.

At the same time, McIntyre said, too much of the couple's other investments are sitting in low-yielding cash accounts. He wants the couple to diversify their stock investments and move into bonds.

Jim Jeschke, 60, retired two years ago from his teaching job with a 403(b) plan, a retirement savings plan common among schools and other nonprofit organizations that is similar to a corporate 401(k) plan. His plan assets are invested in annuity products, a situation McIntyre said adds costs without a corresponding benefit. He recommended rolling the couple's retirement accounts into a low-cost fund supermarket, such as Fidelity or Vanguard.

"They really needed a total restructuring of their portfolio," McIntyre said. "They'll save a lot by getting out of those high-cost products."

For Jim Jeschke's $143,000 retirement account, he suggested putting roughly equal amounts in eight mutual funds.

For his traditional IRA, worth about $75,000, McIntyre would put equal amounts in four more no-load funds emphasizing large and mid-size value stocks, international stocks and inflation-protected bonds.

Linda Jeschke , who works part time as a travel agent, also should roll her traditional IRA into a low-cost fund company, with her $75,000 split among four funds emphasizing large growth and value-oriented stocks, small growth stocks and the total bond market.

The good news is that the couple is spending far less each year than they make on her travel agent's $10,000 salary and his pension. They estimate they spend a little less than $30,000 a year, including the money to maintain the rental units. All told, they are saving about $20,000 a year.

Their unspent pension income has been building in their taxable cash accounts, too, and has grown to nearly $50,000. Because they aren't using all their income now, McIntyre recommended the couple delay taking Social Security payments until age 66, rather than at 62. That was another of the couple's big questions going into the planning process.

Reallocating the investments and deploying the cash will help the Jeschkes solve their housing dilemma, McIntyre said.

The couple's next-door neighbor and friend, Marc Williams, is a general contractor. He made a ballpark estimate of $100,000 on what it would cost to turn the home's third unit into a garage to resolve a parking shortage and make structural repairs to the roof and complete some other projects.

Two veteran local real estate agents, Mike McCausland and Sharon Halliburton, estimated the home's value at about $300,000, though that figure was rough and based on exterior views of the house.

McIntyre recommended turning the home into a two-apartment residence with a garage for each unit.

"Eliminating one of the units would allow you to solve the parking problem and increase the rental rate on the other unit," he said.

As long as the renovation bill stays below $200,000, McIntyre believes the couple can substantially upgrade their standard of living in their home without jeopardizing their retirement accounts.

"You shouldn't take out a new mortgage unless you can comfortably handle the payments [with] your regular income," he told them. But with at least $2,000 a month in unused income, he believes they can handle a major renovation if they choose to go down that path.

As for that $50,000 in cash, McIntyre recommends leaving $20,000 as an emergency fund and keeping another $10,000 on hand to start Roth IRAs for 2006.

The remainder can go toward the renovation to keep borrowing costs down, he said. He also recommends adding long-term-care insurance and an umbrella liability policy on the property and dropping a life insurance policy that McIntyre deemed unnecessary.

Jim and Linda Jeschke are considering the real estate options but said they're feeling much more confident about their financial picture heading down the road to dual retirement.

Janet Kidd Stewart is a Your Money columnist.

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