Dogged resolve needed to fill retirement hole

Self-employed groomer learns she's lagging far behind in socking away cash for future needs

By Janet Kidd Stewart
a Your Money columnist

Published September 3, 2006

Robyn Michaels is in a tough spot.

She's looking for work, spends more than she takes in and is coming up on retirement. But, experts said, the situation is not hopeless.

When her dog-grooming business slowed last spring after eight successful years, Michaels first tried to downsize her 1,700-square-foot shop, Northshore Clippers, into smaller quarters.

But when she couldn't find a smaller rental space that would allow pet traffic, she started to rethink her entire financial picture. At the end of May, she closed the business, picked up some part-time grooming work and started hunting for a long-term job.

Michaels, 52, had been running the business, self-insuring her own health care and trying to save what she could for retirement on her own.

She chose a 15-year mortgage and owes less than $113,000 on her Chicago home valued at about $460,000. She regularly rents out the other side of the two-flat and rents a room in her apartment, which together bring in about $20,000 a year. And she's managed to save $97,270 in individual retirement accounts and other investments.

But she had a sinking feeling she wasn't earning and saving enough.

"I realize I am not in a dire situation compared to most, but I would like to retire in 10 years if at all possible," Michaels wrote in a letter requesting a Money Makeover.

Your Money then enlisted a team of financial and career experts to help Michaels figure out if she can reach her goal.

The bottom line? She's got a long way to go and a short time to get there.

Financial planner Sarah Hussey of the Weston Financial Group in Bridgewater, N.J., estimates Michaels will need a nest egg of roughly $440,000 at retirement to make sure she won't outlive her money.

"Oh, my goodness," Michaels said to Hussey when she heard the estimate. "I'm way behind."

Hussey's estimate is based on an initial-retirement-year withdrawal of 4 percent, or about $18,000, which is about what Michaels is spending now without her mortgage payments. Assuming the mortgage is paid off by retirement, her investments and rent, plus her Social Security checks, should cover her inflation-adjusted expenses, Hussey said.

If she could accumulate $360,000, Michaels would have to take an initial withdrawal of 5 percent to meet expenses, and that scenario carries a higher risk of running out of money before she dies, Hussey said.

To get to the $440,000 figure in 10 years, Michaels would have to save $12,000 a year and have the money grow at 10 percent annually, Hussey said. Both of those scenarios seem unrealistic, especially with Michaels chewing through savings while she contemplates her next career move.

Her dog-grooming income this year, including what came from the business through May and her occasional part-time work, is expected to amount to about $9,600. Rental income from a roommate and from the other unit in her building will generate another $20,040.That leaves a $12,852 shortfall after living expenses.

But things could improve quickly if she finds a job soon.

Before launching her pet-care business, Michaels had spent the bulk of her career in the non-profit world, and she said working with organizations that have a cause still is important to her.

That passion, and her fast-paced speaking style, sometimes can leave her frustrated with the mechanics of a workplace, said career coach Tim Ursiny, founder of Advantage Coaching & Training in West Chicago.

Ursiny worked with Michaels in a telephone session to help her sharpen her interviewing skills.

"In talking with Robyn, I heard four themes," Ursiny said. "In this order, she needs to work with people she respects, have some creativity in her work, be with an organization that is making an impact and the job itself needs to be a personal challenge."

Having been disappointed with her work environment in past jobs, Michaels also needs to be realistic about whether she would be a good fit in a workplace, the experts said.

"You're energetic and optimistic off the bat, but check [prospective employers] for areas that wouldn't meet the priorities you know are important," Ursiny said.

Sharpening the job hunt

Resume expert Elizabeth Handlin, founder of Ultimate Resumes (www.ultimate-resumes.com), helped to polish Michaels' resume and made some specific job-hunting recommendations.

Handlin added more detail to Michaels' description of the non-profit organizations for which she's worked, then gave her some tips on culling information from Internet job postings to zero in on companies that might be a good fit.

Assuming she takes a new job soon, she'll need to start putting her finances in order, too, said Hussey.

Once employed at a salary of at least $35,000, she'll need to begin plowing money into a Roth IRA, Hussey said. At that income level, her tax bite will be minimal, so it's better to forgo the up-front deduction associated with traditional IRAs and fund a Roth IRA, in which money comes out tax-free at retirement.

Overall, once she's employed, she needs to start saving at least $900 a month toward that nest egg, assuming a more realistic 8 percent return, Hussey said. That figure could include savings-plan contributions from a new employer.

She also should start paying $100 more per month toward her mortgage in order to pay it off by a more realistic retirement date of age 65, Hussey said.

"Of course, whatever more she can contribute will really help down the road," Hussey said.

Hussey also suggested some changes to Michaels' long-term-care insurance plan. Her current plan has what appears to be a high daily limit ($220) on daily expenses now but no inflation provision. Switching to a lower daily amount with an inflation rider is a better move, Hussey said.

Socially responsible portfolio

As for her investments, Michaels told Hussey she wants to invest in mutual funds that have a social mission. Looking at 65 so-called socially responsible mutual funds, Hussey screened for core funds that had good track records and low expense ratios.

In the traditional IRA, Hussey suggested moving from a portfolio of relatively expensive funds investing in mid-cap stocks to a balanced socially responsible fund that offers exposure to large and mid-cap stocks as well as international stocks, and another that invests solely in small-cap stocks.

For Michaels' Roth IRA, where she'll be making future contributions, Hussey suggested putting 40 percent in a large and mid-cap socially responsible fund, 20 percent in a social index fund, 10 percent in a small-cap socially responsible fund, 10 percent in a mid-cap value fund and 20 percent in a fixed-income fund.

The planner stressed that this mix is aggressive for Michaels' age, and it will need to be adjusted as she approaches retirement.

Finally, even though Michaels has no dependents, she needs to review her powers of attorney and her beneficiary designations on her investment accounts to make sure her favorite charities or other beneficiaries receive her estate.

Even though she faces a couple of daunting challenges--finding a new job and saving a big portion of her next income--Michaels said she's glad she and Hussey did the math on her future.

"I'm still wondering what my capacity for earning enough really is," she said. "This has really been enlightening."

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Janet Kidd Stewart is a Your Money columnist.

Reprinted with permission

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