Weighting Game

When Muriel Tanzer married 38 years ago, she assumed she’d never have to worry about managing money. She subscribed to Eisenhower-era conventional wisdom that a woman didn’t need to know about the stock market, retirement planning or insurance. All that was a man’s domain.

Then she woke up in a different life.

In the late 1970s, she and her husband split up, and Tanzer found herself on her own with three school-age children. She received child support, but her divorce settlement didn’t include alimony. So Tanzer, who had taught elementary school before starting a family, went back to work teaching.

It was supposed to be a stopgap measure, something to tide her over until she remarried. As for retirement, well, she’d have a husband to make the financial plans and help pay the bills.

“I always thought there would be someone to take care of the financial planning,” she said.

It hasn’t worked out that way. Today, at age 60, Tanzer is single and facing the possibility she may stay single for the rest of her life.

She has accumulated a small nest egg--about $130,000 in stocks and mutual funds--she has tenure in a job that will afford her a pension for life, and she owns her Huntington Beach home, worth an estimated $200,000 to $250,000, free and clear.

But she doesn’t understand finance well, and she knows she needs to take steps to ensure her comfort. She does like investing in stocks, however--in the way a gambler likes a lucky roll of the dice. But when it comes to talk of mutual fund net asset values or stock price-to-earnings ratios, her eyes just glaze over. “Numbers don’t interest me,” Tanzer said.

There is one number on her mind, though--a very important one: the age at which she’ll be able to afford to retire. A bout with cancer a few years ago taught her that time is precious, she said, and she wants to make the right moves.

Enter fee-only financial planner Mary Dean, a San Diego-based expert in investing and retirement planning who looked at Tanzer’s finances for Money Make-Over. Dean’s assessment: Tanzer’s money needs to work harder for her. Once Tanzer has a better-diversified portfolio in place and can gauge what kind of returns she’s getting, she’ll have a basis for determining a retirement date. This much, though, is clear now: “If she retired at age 65 she’d have a shortfall,” Dean said.

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So the planner set to work reviewing Tanzer’s situation. Tanzer had estimated she’d need at least $3,000 a month to live comfortably in retirement. “I’d like to be able to travel if I want and do things I feel like doing,” she said.

Tanzer makes no bones about her propensity to live in the present. “You can’t plan everything that’s going to happen to you,” said the breast cancer survivor who’s now in fine health. “I have to live now.”

Tanzer is comfortable with her current standard of living. Home is a four-bedroom house in Huntington Beach she’s sharing temporarily with a son, 34, and a grandson, 4. She watches her budget, seeing movies at bargain matinees, for example, but she also doesn’t deny herself extras. She dines regularly in restaurants, drives a top-of-the-line year-old Honda Accord, and takes the occasional foreign holiday. Lately, she’s been avidly pursuing weight training, something she describes as important to her physical and emotional well-being. She pays a trainer at a nearby gym $200 a month to assist her. After three years of pumping iron, she can now leg press 300 pounds. “I do it for peace of mind,” she says.

With 17 years on the job at the Irvine Unified School District, Tanzer is near her peak earning power, at $58,350 annually. At present, she is diverting $12,500 of her pretax pay each year to her 403(b) plan, a tax-deferred retirement savings program for nonprofit and public sector employees. She is not saving anything beyond that, however.

The most important source of Tanzer’s retirement income will be her lifetime pension from the State Teachers Retirement System, a program similar to Social Security administered by the state. According to its benefit formulas, if Tanzer retires at age 65, she’d get $2,050 a month. If she stays on the job longer, the pension will rise from there.

Because Tanzer has worked only in the public sector, she won’t get Social Security benefits of her own, although she will be eligible for spousal benefits through her marriage. But those payments will be tiny, if she gets any at all, after she starts drawing her STRS pension. This is because of laws aimed at preventing individuals’ “double-dipping” with government pensions.

By way of explaining how planning for a retirement income works, Dean said that for Tanzer to get $3,000 a month in retirement income today, she would need to have investable assets of $600,000.

Here’s how that might work: $600,000 invested at a very conservative 5% rate of return would produce an income of $30,000 a year. A state pension paying about $20,000 a year (or the amount in STRS pension she could get now, at age 60) would bring her annual income to roughly $50,000. After taxes, she would have something close to the $3,000 a month Tanzer estimates she would need.

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But that estimate is not to say that Tanzer will necessarily need the equivalent of $600,000 in today’s dollars if she ever hopes to retire comfortably. There are variables. She could dip into her capital as she ages; she could assume she’d spend less money as she enters her 80s; she could take out a reverse mortgage on her home to tap its equity. Any or all of these options would reduce what she needs to have in savings at retirement.

What will make the biggest difference, though, is how long Tanzer will work, either full- or part-time.

Tanzer had always assumed she’d retire at age 65. But then again, she enjoys her job. On good days, which are most of the time, she says, she feels she’s making a difference in her pupils’ lives and that she would like to continue as long as she’s physically able.

And, in fact, Dean does not think it would be realistic for Tanzer to try to retire at 65. “She needs a 10-year window to build her resources,” Dean said. “Her asset base is way too low.” The extra time would increase Tanzer’s pension too.

And that’s OK with Tanzer. “I like working,” she said. “I feel like I’m contributing” to society.

In 10 years of saving, Tanzer has accumulated $72,054 in a fixed-income annuity in her 403(b). Her other assets are $14,536 in an individual retirement account invested in a foreign-stock mutual fund and about $35,000 outside of it invested in seven individual stocks, with most of those being shares of foreign companies, and all purchased on the advice of a friend.

She also has about $11,000 cash in a money market account, a solid cushion for unexpected expenses or for her next automobile.

Dean pronounced that portfolio unbalanced and in need of an overhaul. But before she could recommend a new one, there was the matter of risk tolerance.

Tanzer said she would be willing to take on some risk to achieve greater returns in the long run, and Dean told her that indeed that would be necessary. Based on Tanzer’s responses to a questionnaire designed to gauge how much volatility an investor can stomach, Dean came up with a plan allocating all current and future savings to equities.

“She’s got to have inflation protection,” emphasized Dean. Tanzer won’t have it if she leaves so much of her assets in an annuity earning a low return. Since 1925, the average annual return of stocks has exceeded the average rate of inflation by about 7 percentage points. Part of accepting risk and making decisions on the basis of long-term averages, of course, is knowing that the future cannot be predicted and that any market’s performance could see several down years.

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If Tanzer doesn’t retire until 70, then, she’d have at least a decade before she’d have to sell any of her equity holdings. That should be long enough, Dean said, for Tanzer to weather any market storms. Thus, Dean suggested that virtually all of Tanzer’s current and future retirement savings go into equities. However, the planner would much prefer that Tanzer stick with mutual funds rather than invest on her own in individual stocks, which made up almost 20% of her portfolio when Tanzer and Dean met.

That may at first blush appear a risky strategy for someone Tanzer’s age, but actually it’s not. She has a solid hedge in that lifetime STRS pension--it could be seen as the equivalent of a fixed-income component in her portfolio--and thus a bit more wiggle room to invest in stocks than might otherwise be the case.

Dean began the realigning with Tanzer’s 403(b) choice. An annuity is a sure thing, but its returns are low. From the list of choices available through the Irvine district’s program, Dean suggested that Tanzer take the entire $72,054 she has in her Paul Revere annuity and put it instead into a no-load mutual fund offered by USAA Investment Management Co. This company’s funds have low expenses too, Dean said.

Dean suggested that she put the entire amount, plus all of her future 403(b) contributions, into USAA S&P; 500 Index Fund, a year-old fund that invests in the blue-chip stocks of the Standard & Poor’s 500 index. In making this switch, Dean suggested that Tanzer put half the 403(b) sum into the index fund now and the other half a year from now. That way, should there be a stock market plunge, Tanzer wouldn’t have all her 403(b) savings at risk.

Tanzer’s portfolio would be further diversified with her IRA money. Dean recommended that she roll over the $14,536 she has in an IRA in Kemper International Fund (five-year average annual return: 14.4%) at another brokerage into an account at Fidelity Brokerage, a so-called mutual fund supermarket.

Dean suggested placing $5,000 in Fidelity Low-Priced Stock (five-year average annual return: 19.8%), which invests heavily in companies with small market capitalizations and which has a top rating from fund tracker Morningstar Inc. of Chicago. This fund normally carries a load, but Tanzer can avoid the load if she buys it through Fidelity Brokerage, Dean said. Most of the remainder of the IRA money would go into T. Rowe Price Equity-Income (five-year average annual return: 19.5%), a low-risk fund that invests in undervalued large-cap stocks for income and growth potential.

Dean said Tanzer also might want to try Baron Asset (five-year average annual return: 22.6%), a small-cap growth fund that’s shown nice returns. Dean cautioned, however, that this fund should make up a very small percentage of Tanzer’s total portfolio because small-cap investments tend to be volatile.

As Tanzer goes along, Dean suggested, she could add to Fidelity Low-Priced Stock and T. Rowe Price Equity Income, but, again, not so much so that her portfolio becomes unbalanced.

As for Tanzer’s proclivity for foreign stocks, Dean felt it would be wisest for Tanzer to limit international holdings to no more than 16% of her investments. As it is now, Dean is not making her choices based on a coherent strategy, and she has a big chunk of her savings in this one category.

Dean offered two international funds available through Fidelity that she believes will do better than Tanzer’s Kemper choice: Fidelity Diversified International (five-year average annual return: 17.5%), and Janus Overseas (fund is less than 5 years old), a growth-stock fund with a low expense ratio--it’s 1.23%--for its class.

While Dean was in the midst of putting together Tanzer’s new financial plan, Tanzer decided to sell 1,500 shares of Trans World Airlines she’d been holding.

“TWA had been going up and down so much,” Tanzer said, and she wanted to get out while she was ahead--which she was, slightly.

On the advice of a friend who has given her good stock tips in the past, Tanzer took the proceeds and bought shares in three companies: Hong Kong Telecomm Ltd., a telephone company; LSI Logic Corp., a Silicon Valley company that makes integrated circuits for personal computers; and CP Pokphand Co., a Hong Kong-based holding company for agricultural businesses.

On learning of the move, Dean quietly expressed her disapproval. That was money that could have been invested more safely in mutual funds. Tanzer admits she knows nothing about these companies (she didn’t even know the name of one of them), nor could she explain why she would want to invest her money there, other than to say: “Why not? I wanted to try these other three.”

She gets a kick out of holding individual shares, Tanzer said. “There’s something about going to Starbucks and reading how my stocks are doing. It’s fun.”

Tanzer might not be so cavalier about stock purchases should the market take a turn for the worse.

“All she’s known is a strong market,” Dean pointed out. True, she said, Tanzer’s way of learning about stocks may be better than not learning about them at all, at least in this bull market, but this kind of investing is just not appropriate for someone in Tanzer’s position.

And that gets back to Tanzer’s feelings about money. If investing really isn’t something she wants to get deeply into, if she really doesn’t want to comb through financial statements herself, then she’d be wise to seek out advice from knowledgeable sources, Dean said.

And that’s why mutual funds make sense for Tanzer: The buy and sell decisions rest with professionals.

Dean believes the best course for Tanzer is to get advice on a rational financial plan and then to follow that plan. “Once you find an investment counselor you like, it’s best to stick with them,” Dean said. Getting advice from a trusted friend on stock picks, as Tanzer has been doing, is all well and good, but that’s not the same as having someone take your whole financial picture into account and make judgments on that basis.

There are plenty of knowledgeable, trustworthy advisors who are willing to meet, say, once a year, at modest cost, Dean said in urging Tanzer to get help from a professional.

Tanzer took in all the advice and is mulling the many suggestions. “It’s moving a lot of things around,” she said apprehensively. “I’m going to have to think about it. . . . I’ll go through the next year and see what happens.”

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Jennifer Pendleton is a regular contributor to The Times.

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The Situation

* Investor: Muriel Tanzer, 60

* Annual income: $58,350

* Financial goal: To determine a realistic retirement age

* The problem: Insufficient savings in poorly diversified portfolio

* The plan: Work until 70 at least; revamp portfolio to reduce risk, improve returns.

Meet the Planner

Mary Dean is a certified financial planner and owner of Dean Consulting & Associates, a fee-only investment management, insurance and retirement planning advisory firm based in San Diego. She has an MBA from UCLA and is a certified public accountant.

This Week’s Make-Over

* Investor: Muriel Tanzer, 60

* Occupation: Teacher

* Gross annual income: $58,350

* Financial goals: Plan for retirement and determine a realistic retirement age.

Current Portfolio

* Real estate: Estimated $200,000 to $250,000 in equity in Huntington Beach home owned free and clear

* Retirement accounts: About $72,000 in Paul Revere annuity in tax-deferred 403(b) account; about $14,000 in Kemper International Fund in individual retirement account

* Individual stocks: Holdings total about $35,000, with most in foreign companies: Energy Group, Hanson, Imperial Tobacco Group, Millennium Chemicals, Hong Kong Telecomm Ltd., LSI Logic Corp., CP Pokphand Co.

* Cash: $10,773 in a money market account

Recommendations

* Tanzer has no deep interest in retirement planning or the specifics of investing, so she should have ongoing professional help with her finances.

* Avoid individual stocks. A small investor who knows little about the markets would be better advised to put her savings into mutual funds.

* Revamp unbalanced portfolio to achieve better diversity and a greater likelihood of better returns. Reduce foreign exposure. In particular, the 403(b) money now in a low-return annuity would be better invested in a U.S. index fund; future 403(b) contributions should go there as well. IRA money should be spread among several types of stock funds, such as large-cap growth-and-income, small-cap and foreign.

Recommended Mutual Funds

* Baron Asset: (800) 992-2766

* Fidelity Diversified International: (800) 544-8888

* Fidelity Low-Priced Stock

* Janus Overseas: (800) 525-8983

* T. Rowe Price Equity-Income: (800) 638-5660

* USAA S&P; 500 Index: (800) 382-8722