Independently Healthy

Kathy Harter is learning to manage her own finances. She admits it’s about time.

Harter, now 50, was divorced young and reared her daughter, Laura, on her own. She often felt overwhelmed when it came to money, so she relied on her father to make all her financial decisions. What began as a stopgap measure, however, went on for more than two decades--until last year, when her father became too ill to offer financial guidance.

Harter, a freelance writer and computer operator, began to study the portfolio her father had purchased for her over the years. As she began educating herself about financial matters, she found herself at another crossroads. Her daughter was engaged and had bought a house in Northern California; her father had become incapacitated with Alzheimer’s disease. Harter felt her ties to Los Angeles were being cut. Although she had neither family nor firm employment waiting for her, she decided to move to Honolulu last month.

“I’m free!” Harter said with a laugh. “Mummy is going wild.”

She may have to go wild on a strict budget, warns Phillip E. Cook, a certified financial planner based in Torrance.

Harter’s portfolio, almost all of which was selected by her father, is worth an estimated $150,000. It consists of savings bonds with a total face value of $100,000 but a current value of about $62,500. She has a variable annuity worth $13,800; $26,580 in the T. Rowe Price New Income bond fund (five-year average annual return: 6.7%); $14,600 in an individual retirement account invested in T. Rowe Price’s High-Yield bond fund (five-year average annual return: 9.8%); and about $9,100 in 225 shares of utility company American Electric Power Co.

Since she started making her own investment choices, Harter has purchased shares in two other T. Rowe Price funds. She now has $5,600 in the firm’s Equity-Income stock fund (five-year average annual return: 17.1%) and $4,300 in its Blue Chip Growth stock fund, a fairly new fund. She has about $14,000 in her checking and savings accounts.

Not only is her nest egg not large enough for someone her age to ensure a comfortable retirement, it is invested in a way more appropriate for someone many years older, Cook said. Only 13% of Harter’s assets are positioned for growth in the stock market. The remainder are in bonds and other slow-growing investments that, while offering greater safety than stock investments, also have significantly less potential for long-term gains.

Because Harter’s employment situation is tenuous, it will probably be difficult for her to save as much money right now as she’d like to.

Hers has been nothing if not a free-spirited lifestyle.

For most of the 1980s, she worked as an executive assistant, earning a steady but modest salary. She left that job in 1989 to pursue a career as a mystery writer, winning notice in contests but no publishing contract. In recent years, Harter said, her gross annual income has hovered around $20,000 to $25,000. But $10,000 of her annual income is a gift from her parents.

Having a supportive family is great, but, as Harter admits, it has also allowed her to maintain an impractical approach to money, to put off thinking seriously about providing for her own financial security in old age.

“I was Daddy’s girl; it made me very lazy,” Harter said. “When he got sick, I was losing more than a father, I was losing a safety net.

“My dad originally put me in the T. Rowe Price funds, and when the stuff came in the mail, I either filed it, threw it away or put it in a box unseen and unread,” Harter confesses.

“As my dad started getting sick and wasn’t able to do as much, I felt better when I began to at least start reading the stuff.”

Cook’s first advice to Harter: Firm up her employment situation. She was recently hired as a receptionist by a local television station three afternoons a week--a start--but she realizes now that she needs full-time work.

Harter, ever the optimist, is hopeful that the job will lead to something bigger.

“It’s a place to meet people and get contacts,” she said. “It’s someone on the island who says, ‘Yes, she shows up on time, she does good work.’ And there are a lot of contacts here that can lead to other things.”

Once Harter is employed full time, she can start augmenting her retirement fund by investing the $10,000 a year she gets from her parents, Cook said.

Indeed, if she wants to retire with $30,000 a year of income in today’s dollars--what it would take to support her present lifestyle--Harter needs to begin putting aside $1,100 a month as soon as possible, Cook said. That means she needs to save a bit beyond what her parents are providing.

Harter also needs to learn to budget and to save on a schedule rather than rely so much on her parents’ generosity, Cook told her.

“You need to get into the habit of making economic decisions, not comfort decisions,” the planner said.

Harter said she wants to be responsible for her own financial well-being, but she admits it’s hard for her to make the kinds of sacrifices most adults can expect to have to make.

For many, those sacrifices are motivated by a fear of a destitute old age, but, said Harter, “I’m not going to be out on the streets,” pointing out that she thinks it’s unlikely that her daughter, her sister or her mother would allow her to live in poverty.

Cook responded that one never knows what the future holds.

“It’s just not prudent to rely on things that are completely out of your control,” he told her. “You have no control over your daughter’s marital or financial situation. You have no control over your parents’ . . . or sister’s situation. And having no financial control really should concern you.”

Harter agreed but said she finds it hard to plan with the thought of a worst-case scenario.

“I mean, you can’t live as if everything is going to go wrong,” she said.

Be that as it may, Cook believes that Harter needs to make serious adjustments in her portfolio. Nearly 90% of her investments should be in the stock market, he said.

“Your portfolio right now is flip-flopped. It is emphasizing income to the detriment of long-term growth, and consequently you’re going to be penalized in the future when you need to live on this money,” he told her.

The planner recommends that she start the revamping by selling the bulk of her government bonds and bond mutual funds and also her annuity. That would give her slightly more than $100,000 to reinvest.

That money and future savings that don’t go into her IRA should be apportioned as follows: 25% in a large domestic value-stock fund such as Dodge & Cox Stock Fund (five-year average annual return: 18.8%); 25% in Fidelity Contrafund (18%), a growth fund that invests in large and mid-capitalization companies (and that can boast of a top, five-star risk-adjusted performance rating from fund tracker Morningstar Inc.); 30% divided between two international stock funds: Fidelity Diversified International (five-year average annual return: 13.9%) and Hotchkis & Wiley International (14.1%).

Harter was hesitant to take this last bit of advice.

“I don’t trust non-U.S. markets. In one word: Japan,” she explains, referring to the recession that cut the value of Japanese stocks in half.

Over the long term, however, having an international element in an investor’s portfolio has been shown to reduce risk and boost returns. Moreover, Cook points out, Americans remain heavily dependent on imported goods, so they ought to own some international investments to maintain their buying power.

“What kind of car do you drive?” Cook asked Harter, to which she responded, laughing, “A Honda.”

Cook believes commercial real estate will be a good investment for the next few years, so he recommended that 20% go into a mutual fund specializing in real estate investment trusts, such as Cohen & Steers Realty Income (five-year average annual return: 16%).

Harter’s IRA was considered separately. Cook urged her to contribute the maximum allowed every year to take advantage of the fact that taxes on its earnings are deferred. Cook would like to see Harter’s IRA, now invested in the T. Rowe Price High-Yield bond fund, invested in an aggressive-growth stock fund such as Evergreen (five-year average annual return: 14.7%), which invests in mid-cap companies.

“You’ll be in your IRA for at least 14 years, so it’s a place to go for aggressive growth,” Cook said.

Although this might at first blush appear to be an unusually aggressive asset mix for someone in her 50s, it’s necessarily that way because Harter has a relatively small amount saved and isn’t earning enough to begin saving a great deal more.

Ideally, Cook said, he would like to see Harter sell her American Electric Power shares and put the proceeds into mutual funds. As it is now, too much of her assets are being risked on one stock. Because of tax considerations, he said, the best course would be to sell the stock next year--unless it takes a sudden dramatic downturn before then.

“In your mind, you should set a price--maybe $5 below where it is trading now--where you should probably sell it anyway,” Cook advised her.

Finally, Cook urged Harter to read financial magazines and newspaper business sections. And so she’ll have a better idea of what her income will be when she retires, he told her to write to the Social Security Administration and request an estimate of her expected retirement benefits.

“You need to continue to educate yourself,” Cook said.

*

Los Angeles-based freelance writer Helaine Olen is a regular contributor to The Times. She can be reached on the Internet at [email protected]

Los Angeles Times

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This Week’s Make-Over

* Investor: Kathy Harter

* Age: 50

* Occupation: Self-employed writer and computer operator; seeking full-time employment after recent move to Honolulu

* Gross annual income: $20,000 to $25,000

* Financial goal: Take control of her financial life

*

Current Portfolio

* Harter’s net worth is approximately $150,000.

* Only 13% of her assets are in individual stocks or in mutual funds that invest in stocks, including T. Rowe Price Blue Chip Growth, T. Rowe Price Equity-Income and 225 shares of American Electric Power Co.

* Most of her money is in safer but slower-growing investments such as T. Rowe Price’s New Income and High-Yield funds, a variable annuity with Jackson National Life worth about $13,500 and U.S. Savings Bonds with a face value of $100,000 and an estimated current worth of $62,500.

*

Recommendations

* As income increases, attempt to save $1,100 a month, putting the maximum allowable amount into her individual retirement account.

* Her IRA, now invested in T. Rowe Price High-Yield, should be invested in an aggressive-growth fund instead.

* Sell the bulk of her annuities, government bonds and other bond mutual funds.

* Sell American Electric Power shares, perhaps next year, and invest the proceeds in mutual funds.

* Her current assets and future savings, aside from what goes into her IRA, should be apportioned as follows:

Domestic large-stock funds: 50%

International-stock funds: 30%

A mutual fund that buys real estate investment trusts: 20%

*

Recommended Mutual Fund Purchases

* Fidelity Diversified International (800) 544-8888

* Fidelity Contrafund Hotchkis & Wiley International (800) 346-7301

* Cohen & Steers Realty Shares (212) 832-3232

* Dodge & Cox Stock Fund (800) 621-3979

* Evergreen (800) 807-2940

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Meet the Planner

Phillip E. Cook is a certified financial planner ho works on a fee and commission basis. He is based in Torrance. He is a registered principal with Financial Network Investment Corp. and specializes in tax, estate and retirement planning. He has taught personal finance classes at Los Angeles Harbor College is a former USC adjunct professor.