The Seeking Alpha Community is a wonderful collection of professional and do-it-yourself (DIY) investors with a wealth (no pun intended) of information to draw upon. I am turning to these very individuals to introduce them to Zelda, a real-life person who very likely represents a larger portion of retirees than many of us realize. This article really stems from Colorado Wealth Management Fund's Ted and Mary stories.
Zelda is not her real name. What I can tell you about her is that she is a relative of mine and she has a heart of gold. Her life as she once knew it has been shattered over the course of the last 18 months. But like the trooper that I knew she always has been, she has persevered against the odds and continues to win. Obviously, Zelda is very special to me and my family.
Her story begins with a late stage diagnosis of cancer - diagnosed after months of doctor's visits to address moving pain in the abdominal, back, and sides. She suffered from malnutrition and her outlook was quite grim. The rally of family and a family friend assisted Zelda to a nutritional state that allowed her to endure chemo treatments and subsequent surgery. She once was moved about in a wheelchair, now she goes on walks, and it is great to have her with us. Through all of this, she had to relocate so family could provide the support she needed and deserved. This included packing her home of many years, moving to independent living, and again to an apartment. That home of many years recently sold and she finds herself in new beginnings as the last of her ties to her life there comes to a close. She lived in a small community with many knowing of her kindness. She now lives in a bedroom town where one of her sisters lives and I am a short distance away.
Zelda worked her whole life for a grocery store as a cashier, head cashier, cashier supervisor, and bookkeeper. She went through multiple store owners and she was an icon of the store, sorely missed after retiring in her early 70s. She has never been married. Her nieces and nephews along with the great ones are her well-loved children. All of the information I am going to present to you does represent her financial and investment picture.
I want to pause here for a second to allow you to digest Zelda's lifetime employment. It is an amazing feat to work all of your life at the same place; yes, you can get a feel that Zelda did not earn a great deal of money throughout her working lifetime, but she enjoyed her work. She would not likely admit it, but she enjoyed the people. She has a quiet and yet gruff demeanor to some.
What's my role in Zelda's life?
A number of years ago, Zelda provided me Power of Attorney for her finances. While nursing herself back to a healthy state, I was charged with the handling of some of her finances. Luckily her local bank had embraced online banking and a smartphone application that allowed mobile deposit of checks and a way to check balances. So, of late my role has been learning about her finances and trying to capture where all of her capital is located. I love Zelda dearly, but it is clear to me that she was never fully made aware of the value of investing for growth. All of her savings have been either in fixed income assets like certificate of deposits (CDs), regular bank savings accounts, and annuity products. She is definitely risk averse, something that I hope to change to some degree. Many will argue that at her age I should not try to change her. My real hope is simply to introduce her to the basics of compounding over time with income generation. Obviously the decision is hers to make. My role is just to create the pictures of opportunity and 'opportunity cost.' I doubt she changes, but I will be there to support her along the way and that is what really matters most.
Income and Expenses
Zelda recently came into $73,500 from the sale of her home and she is now on a quest of what to do with those funds. Before we take a look at what to do with this newly found capital, we need to fully explore Zelda's finances and current investments.
Zelda's income is comprised of three streams: Social Security, and two annuities. Her Social Security monthly income is $1,428. One annuity payment is $431 monthly for the remainder of her lifetime. The second annuity payment is $85 monthly and will likely last for 15 years depending on investment return. This gives Zelda a total monthly income of $1,944 a month or $23,328 for the year.
On the expense side of the equation, Zelda pays out monthly $550 for rent/water/sewer/gas, $65 for internet/TV, $65 for electricity, $166 for medical, $17 for Rx, and $44 for AFLAC supplemental insurance. These are her fixed expenses for a monthly total of $907. Other variable monthly expenses are her consumables (i.e. auto fuel, groceries, personal care). Periodic expenses are her renter's and auto insurance along with a yearly Farm Bureau membership fee. Her monthly discretionary income is $1,037 to cover the variable, periodic, the unexpected, and her savings.
If there is one negative with Zelda, it would be her enjoyment of slot machines. But I cannot find fault with her on this because she is very disciplined with her visits to the casinos and she does have capital saved. And she seems to have reasonable success with picking a winning slot machine. This is her one life indulgence and I see no reason to intervene as long as it does not become an addiction.
I am still working to grasp the total amount of assets she amassed. Between three different banks around her former home, she has $69,000 in CDs. Her cash balance is $27,000. Zelda opened a new bank account and then recently added to it the proceeds from the sale of her home, $73,500.
I am not including the two annuities she is currently drawing on since I have included them in her monthly income. There is one other annuity that she owns. It is a variable annuity and has been in place since 2000. It was a single premium annuity of $15,000 and has grown to $28,000 for a compound annual growth rate (CAGR) of a little over 3.7%. Now I haven't really gotten out of Zelda how this annuity came about. As I reviewed the product, it does not begin to pay out until the year 2036, unless she elects to start withdrawals. In visiting with her, I believe the selling point was that it has a life insurance benefit of about 2.23 of the original face value. The current assets are invested in Large Cap Growth - 44.4% (TA Morgan Stanley Capital Growth and TA Torray Concentrated Growth), Large Cap Blend - 23% (Fidelity - VIP Contrafund Portfolio), Large Cap Value - 19.7% (Fidelity - VIP Equity Income Portfolio), and Foreign Stock - 12.9% (TA TS&W International Equity). I will need to spend some time in the future reviewing the investment choices with this variable annuity. I did see that there is an annual $35 fee deducted.
Zelda's total assets are $197,500 at this time with $69,000 tied up in three CDs with maturities ranging from later this year to 2020. This represents 36.8% of assets in fixed income securities and the remainder in cash.
I am encouraging Zelda to consider investing the $73,500 into equity-type securities to create growth opportunities and additional income. I might have put my foot in my mouth as I told her we could get a 4% income stream with minimal risk and growth opportunities with the goal of increasing the balance to $85,000 in 5 years or 2.95% CAGR.
When I was visiting with Zelda on drawing up a portfolio for her I was sensing she was scared to death of the thought of losing her money. Her reaction confirmed my knowledge for her risk aversion. I started working on a possible portfolio and then the unexpected happen. I received a phone call from Zelda's brother. My instincts on Zelda's risk aversion and willingness to entertain investing the $73,500 into an equity portfolio were correct. I have a good relationship with Zelda's brother and he simply shared with her that he would be happy to talk with me. Apparently Zelda did not want to tell me how uncomfortable she was with the thought of possibly losing her principal. My simple response was I will most certainly honor her wishes; after all it is her money and she needs to be comfortable with where it is invested.
In short, we invested $70,000 at her new bank in a 25 month CD at 1.5%. If we get two more interest rate increases this year and then another 4 next year, we figure that we could end up with a 1.5% total increase. New CD rates at that time are likely to be around 1.5%, meaning we are not missing out. Also, of the $69,000 in CDs, $49,000 is coming due in another few months, so we could look at shorter termed CDs when reinvesting this amount.
I would have liked to create a portfolio for Zelda. I always enjoy working with others on their finances. The most important aspect whenever you are working with individuals is to understand their risk tolerance and financial situation. You can make recommendations as long as in the end the individual is comfortable with the final selections.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.