Strong portfolio needs consolidating massage

From stocks to real estate, it's time for avid investor, 62, to simplify

October 07, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Tribune Media Services

Rosemary Tanfani sits at retirement's front door with an enviable net worth, but a lush standard of living down the road isn't guaranteed.

Much of the single 62-year-old's assets are tied to a weakening California real estate market and in single stocks with mixed track records.

Her two single-family-home rental properties need costly improvements and haven't produced much in the way of returns. But the softening housing market and tax consequences of selling have kept Tanfani mired in indecision.

"Rental repairs and updates seem to be eating up my monthly income," she wrote in requesting a Money Makeover.

Although better off than most investors, Tanfani, like many, needs to adjust her portfolio as she approaches retirement.

Tanfani has been a self-directed investor, buying up shares of individual companies she researches herself, along with a handful of mutual funds. She said she tried hiring financial advisers, but none seemed to provide any useful ideas she didn't already have herself.

Still, she felt she needed some guidance to help set up her finances for her golden years.

"At this point, I'm just frozen and don't know what to do," she said in an interview.

Michelle Maton, a veteran financial planner and tax adviser with Aequus Wealth Management Resources in Chicago, had some ideas.

After a few sessions with Maton, Tanfani had a solid game plan for disposing of her real estate holdings and working the profit into an investment plan that better matches her risk tolerance.

Tanfani called the plan a "masterpiece."

Maton said Tanfani would need to manage her real estate and other investment gains in a way that better fits her risk tolerance today and as she moves into her later years.

After considering a variety of real estate investment vehicles designed to delay having to pay taxes on the gains from Tanfani's properties, Maton said she thinks it is time to bite the bullet and sell the two rental homes, worth an estimated $750,000 combined.

Maton considered the potential tax savings if Tanfani moved into one property at a time, living there long enough to qualify as her residences to avoid taxes assessed on investment properties.

"That would be a big burden to you and [would] take years," Maton said. "You will have to weigh your quality of life versus the tax savings."

In the end, Maton focused on two scenarios: Selling the properties or holding them permanently. She recommended selling the properties gradually, one in 2008 and one in 2009.

"Even paying the [capital gains] taxes, selling makes sense," Maton said. "You're not getting enough return out of those properties."

After total expenses, but not depreciation, Tanfani is making $8,035 per year on her rentals. Dividing that profit by the equity in her homes shows returns of 2.17 percent on one property and less than 1 percent on the other, Maton said.

Another bonus for selling the houses: the time Tanfani would gain by not having to deal with home repairs and upkeep.

She would much rather spend that time playing tennis, a longtime hobby, or teaching fitness classes to seniors, from which she recently started picking up some part-time income after ending her full-time career in sales in 2005. She divorced in 1986 and has one adult child and no dependents.

Right now, her income isn't keeping up with her expenses, so she has been drawing down her cash accounts to make ends meet.

In the future, health care could be a wild card. Tanfani still has a year of eligibility for COBRA health coverage from her previous career because of an extension, but she is facing a gap of at least two years before she becomes eligible for Medicare, and she has some health issues that require medication.

So she needs to make the most of her investments. Without the real estate, she has $8,600 in a money market account, $343,162 in taxable investments and $418,536 in two individual retirement accounts and a Roth IRA.

Tanfani's answers to a risk-tolerance questionnaire pointed to the need for a portfolio that had about 60 percent bonds and 40 percent stocks, Maton said, while her current allocation is roughly 22 percent bonds and 78 percent stocks.

While risk questionnaires aren't an exact science, the significant gap between her answers and her portfolio is a strong signal that Tanfani could be caught off guard by a significant market downturn, Maton said.

An avid stock investor for decades after her father taught her about investing, Tanfani holds large positions in the stocks of several giant U.S. companies, mostly through a hodgepodge of individual dividend reinvestment plans.

She has nearly $144,000 - 42 percent of her taxable investment account - in shares of Intel Corp., Exxon Mobil Corp., Aflac Inc., General Electric Co., International Business Machines Corp. and Bank of America Corp.

"Single positions are inherently more volatile than diversified portfolios," Maton said, adding that she strongly suggests Tanfani reduce her single-stock holdings.

Finally, like many investors, Tanfani has multiple accounts held with several financial institutions. By consolidating her IRAs and her taxable accounts, her nest egg will be much easier to manage.

Janet Kidd Stewart writes for Tribune Media Services.

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