Meet 69-year-old David O’Meara, a very rare retiree. While most of us are sweating bullets watching the coronavirus pandemic shrink our retirement portfolios, if any, O’Meara is cool and calm.
The Rainier Beach homeowner has pensions and an annuity. Which is to say O’Meara has something that only 17% of private-sector workers can now count on — an old-fashioned defined-benefit retirement plan.
When O’Meara arrived in Seattle from Boston in 1978, he followed his dad’s advice and joined a union. O’Meara was an ironworker for 20 years, then became a union organizer in the construction industry.
He has pensions from the Ironworkers Union, Glaziers Union and Painters Union. He also has an annuity that he could convert into cash. But should he? That’s one reason he asked for a Seattle Times Money Makeover.
“Basically, now that I am retired, what should I do with my money in my golden years?” he asked.
To answer that question, the first thing certified financial planner Brian Lockett, of Comprehensive Wealth Management, did was to get a picture of the family’s income and expenses.
O’Meara’s wife Elizabeth is 65 and works as an office coordinator for a health clinic. She makes $35,000 a year and plans to retire when she is 68. She has saved $116,000 in a 403b, often described as a cousin of the better-known 401k.
David’s three pensions pay $5,000 a month and he gets a Social Security payment of $1,600 a month.
The couple spends about $3,000 a month in core living expenses. Their home is paid off, so they don’t have a mortgage. Their daughter Kathryn is about to graduate from college in Canada. Half of her tuition was paid for by the couple’s investment in the state’s GET program. Grad school will be another story.
“They are budgeting to pay for their daughter’s grad school,” Lockett says. “She wants to be a social worker and their share of her tuition and living expenses will be about $25,000 a year for two years.”
Another family expense is medical insurance, which is covered under Elizabeth’s employer. Coverage for the whole family is $4,550 a year for medical and $2,216 a year for dental.
The biggest expense that could be coming up is pretty exciting. The couple is considering living in Cork, Ireland, for part of the year once Elizabeth retires. All of David’s paternal grandparents came from Cork, and the couple plans to spend part of this summer in Ireland to see how they feel about the move.
They’ve saved about $108,000, which they have in a bank account that O’Meara says gets “about zero-point-zero interest.”
Another reason O’Meara and his wife wanted a check of their finances is that they have owned a rental house in South Seattle for many years. It’s been the source of about $1,200 a month in income, as well as a cause of heartburn.
“We had to evict a tenant who stopped paying rent,” O’Meara says. “It cost $10,000 between the loss of rent and the attorney.”
Recent city moratoriums on residential evictions are part of the reason O’Meara says he’s thinking about getting out of the landlord business.
Lockett alerted O’Meara to another pitfall with the rental house. “Dave and his wife have had that rental since 1992. It is fully depreciated,” Lockett says. “They have run out of tax benefits on the rental.” The couple would also get hit with depreciation recapture tax if they sell.
“I did not know that!” says O’Meara. “I guess that’s why Brian recommended the 1031 thing.”
Lockett suggests the couple could do what’s known as a 1031 exchange into a Delaware Statutory Trust (DST). As the planner explained it, the O’Mearas would swap ownership of their rental house for part-ownership of a property like a 500-unit apartment building or big storage facility that they would share with other investors. The real estate would be maintained by property managers so it would be less troublesome. Because it’s an exchange it wouldn’t trigger taxes.
“These are already vetted. This is not the Wild West,” Lockett says. “They offer income of roughly 5% plus diversification and freedom. And Dave can get depreciation again.”
Lockett disclosed to the O’Mearas that he would get paid a 5% commission by the sponsor of the DST.
The couple talked it over and David realized something about himself. Because most of his retirement is in pensions that are managed by his employer with the risk shouldered by the employer, he doesn’t have experience making investment decisions and he’s feeling overwhelmed.
“I’m kind of spoiled. I never had to look at investments or hire planners like other people have had to do,” O’Meara admits. “This is the difference between the rugged individual and the collective!”
Now that the planner had all the numbers, Lockett ran different scenarios through the O’Mearas’ retirement years. The plan assumes a life expectancy of 88 years for both David and Elizabeth, which Lockett says is pretty young compared to most plans, but it’s what they wanted given their families’ medical histories.
He found that if they kept the rental and turned the annuity into an income stream, they would have a nest egg to leave to their daughter of about $760,000 at the projected end of their retirement in 2043.
But if the couple did a 1031 exchange with the rental and rolled the annuity into a 401K, they would have an extra $124,000.
While he recommends the real-estate exchange and rollover, Lockett told the O’Mearas, “You are in a great place and could leave everything as is and be just fine.”
So that’s what the couple is going to do. For now, they will keep the rental and leave the annuity on hold until David turns 72, which is a delay made possible by the SECURE Act of 2019.
By going through the planning process the O’Mearas discovered they are in much better shape for retirement than they realized. Great shape, in fact. But David says when it comes to money, he still has one regret.
“I’ll tell you a story. When I was an ironworker tying rods, Gino the welder said, ‘I’m selling everything and I’m buying Microsoft.’ I said, ‘Micro-what? Yeah, you go ahead and do that Gino!’ So me and Frank Sinatra, we have a few regrets.”
Calming the fear: Advice from this month’s planner
Planner Brian Lockett and his firm Comprehensive Wealth Management did something bold in the third quarter of 2019: They moved clients out of stocks and into bonds and cash. COVID-19 wasn’t on the radar yet, but the firm believed market indicators were “flashing red.”
For the rest of us whose investments took the escalator up and the elevator down — here are Lockett’s tips to calm the fear.
Focus on immediate needs
Build (or rebuild) your foundation of safety, typically three to six months of short-term expenses. Don’t raid your rainy-day fund to try to replace investment losses.
Continue contributions to your 401k
The best time to buy is after market sell-offs, so consider increasing your contribution. Buying low actually decreases risk, Lockett says.
Learn from this downturn and spread your money out, not only between stocks and bonds but also across companies, industries and asset classes to tame risk.
It’s too late to prevent loss that’s already occurred
Don’t panic and flee to perceived safety after the fact or you risk missing out on recovery. The months directly after large market sell-offs are usually highly volatile, which can be scary. Have discipline and remain true to your long-term investment goals.