Tackling College, Retirement and Lifetime Support : Fine-Tuning Is All It Takes After Series of Wise Moves

They’re among the toughest financial challenges anyone could face: saving for retirement while also financing your children’s college educations and supporting a young disabled child for a lifetime.

Jackie Motobo is ready to tackle all of them.

After earning degrees from USC and Cal State Los Angeles, doubling her money on several real estate bets and working her way up to a secure job with Los Angeles County, the 48-year-old health-care administrator is now single-handedly raising three children, the oldest of whom has Down syndrome.

But thanks to prudent financial decisions, careful planning and consistent saving, Motobo is in an excellent position to retire by age 55 with her mortgage paid off, cover university educations for her two youngest children and provide lifetime support for her oldest, said Neta Gagen, a certified financial planner in Garden Grove.

By doing some serious estate planning, tinkering with her investment portfolio, selling a rental property and making some other adjustments, Motobo should be able to meet all of her goals, the planner said.

“You’ve done a super job,” Gagen told Motobo. “Saving for a child’s college education is daunting enough, but estate planning for a disabled 14-year-old is one of the toughest things there is.”

Motobo has amassed a heavyweight nest egg of about $400,000 through hard work, regular saving in her county retirement accounts and some inheritance. Including her real estate equity, she has a net worth of about $800,000.

Motobo, who takes time to volunteer in her spare hours, lives in Culver City with her children. Her husband left in 1991 after 11 years of marriage, just two months after Motobo’s father died and five months after her mother died of Alzheimer’s disease.

She is fortunate, she says, in that her ex-husband has almost daily contact with the children and keeps them nearly every weekend. He often buys them clothes, shoes and toys without asking to be reimbursed. He regularly pays $600 in monthly child support.

Danny, 14, is in a high school special education program and has the academic ability of a 4- or 5-year-old. Brandon, 11, a sports enthusiast, wants to attend UCLA and then play for the Los Angeles Lakers. Stacie, 9, plays the flute and also hopes to attend UCLA.

“We live a simple lifestyle,” Motobo said. “My kids have all the Nintendo games, and we go to Hawaii once a year, but we aren’t extravagant. We don’t shop for entertainment. I’ve been in my house 15 years and it’s never been painted.”

Motobo got her first job at age 15 selling cotton candy at the old Pacific Ocean Park amusement center near Santa Monica. After graduating from college, she took a job taking welfare applications with Los Angeles County for $535 a month in 1970. She’s been there 26 years and now makes $5,214 a month, or about $62,500 a year.

She’s made a lot of very smart financial decisions, Gagen said. Motobo bought her first car for $3,600 in cash. In 1977, she bought her first condo, in Cahuenga Pass off the Hollywood Freeway, for $45,000, and sold it about 18 months later for $80,000. In 1979, she bought a townhouse in Monterey Hills for $95,000 and sold it two years later for $120,000.

She has no debt besides the current mortgage on her $380,000 four-bedroom home in Culver City, in which she has $210,000 equity. She is selling her rental property in Mar Vista, in which she has $200,000 in equity.

To help boost her retirement nest egg, Motobo should take cash from the sale of her rental property and use it to build up her stock and bond portfolio. However, about $30,000 could be used for Motobo to buy a new car, since her 10-year-old Mercedes is badly in need of repair and Motobo wants to get a sport utility vehicle.

“You definitely deserve a new car, if that’s what you want. And you can afford it,” said Gagen.

That’s great news to Motobo. “My children each want their own car door--that’s key for them right now,” she said.

Motobo owns stocks mostly through mutual funds, but they are almost all large-company stocks, and that’s too much in one area, Gagen said. Those allocations should change to 35% in large and medium company stock funds; 20% in small-company stock funds; 25% in international and emerging markets and 20% in bond funds.

Stocks are a particularly unnerving area for Motobo, usually a decisive woman. But when it comes to her stock investments, she sometimes becomes uncertain, especially when she listens to her broker. “He explains the stock market to me, but I just don’t grasp what he is saying,” she said. “Particularly when he is trying to explain to me when to sell a stock, as in when interest rates go up or down and the market changes correspondingly. He wants me to get single stocks and follow them. I can’t do that.”

Motobo doesn’t need to be in single stocks, Gagen said. A busy woman, she doesn’t need or want investments she must actively monitor.

Still, Gagen recommended some new funds for Motobo. She should sell some of her Dean Witter funds and buy others with lower expense ratios. Specifically, Gagen recommended that Motobo sell Dean Witter Value Added Market Equity (five-year average annual return: 14%, with an annual expense ratio of 1.5%), and invest in Dodge & Cox Stock (five-year average annual return: 17.8%) instead because it has a much lower expense ratio of 0.6%.

While Gagen agrees that another fund Motobo owns, the PBHG Technology & Communications fund (1996 gain: 54%), is a great fund that has performed well recently, it is not such a great fund for Motobo. Because she needs broader diversification, Gagen said, Motobo should not be in PBHG, which is more volatile than a diversified fund. It would be better for her to let individual managers make industry-sector decisions. So she should sell the PBHG fund and invest in more diversified funds.

Once Motobo shifts her portfolio, and considering the $1,100 she will get each month from her county pension, she should have enough retirement funds to live on $3,000 a month until she is 90 and still leave $400,000 in today’s dollars to her children.

Those calculations are based on Motobo getting no Social Security. Motobo hasn’t paid into the Social Security system since 1982, and the county’s noncontributory retirement plan will subtract any Social Security benefits she has earned before paying her the difference. Because Motobo does not expect to receive much, Gagen decided to discount it. The figures also assume a 3% annual inflation rate, and that Motobo will earn at least an 8% return on her new, more diversified stock and bond portfolio.

How will she finance her kids’ education? Each child was given $10,000 at birth by Motobo’s parents, giving them a nice start on college. Danny now has $51,697, Brandon has $39,566 and Stacie has $25,768. Each child is in the same several funds, including Fidelity Magellan (five-year return: 15.4%) and Fidelity California Insured Muni (five-year return: 6.5%).

Motobo said she put her children in tax-exempt funds because their money is taxed at her tax rate until they turn 14.

Gagen said Motobo has done very well with her children’s college planning, but she should change the allocations in those accounts to match those recommended in her own retirement accounts. Because Brandon still has seven years before college, there is still time to be fairly aggressive with those portfolios.

Because Danny will not attend college, the $50,000 he has in his fund will help offset the costs of his lifetime support, Gagen said.

Still, despite those savings, providing for Danny’s financial security--the final and most difficult, but most important, part of her make-over--will require some careful estate planning.

First of all, Gagen said, Motobo needs to create a living trust for her estate, which is valued at about$1 million--including her current net worth of about $800,000 and the death benefit of $198,000 from the term life insurance policy she has through the county. After applying the estate tax exclusion of $600,000, the remaining $430,000 in Motobo’s estate is subject to an estate tax of $150,000, Gagen said.

The primary issue here is how to pay for the estate tax. Gagen recommends Motobo obtain additional insurance to provide the needed cash. That additional policy of at least $150,000 should be put in an irrevocable insurance trust to keep the assets out of her estate. The beneficiaries to that trust could be the children. The cost of that additional insurance will be cheaper than the $150,000 in estate taxes she would otherwise pay, Gagen said.

“If she died today, her children would be socked with estate taxes,” Gagen said. “Even if she lives for the next 30 years, she will be faced with [either] paying taxes or giving it away to her children.”

Because Motobo is a healthy 48-year-old and her assets will grow faster than she will spend due to her frugal lifestyle, her estate will continue to grow substantially in the next 30 years, aggravating her estate tax liability problem. Much of that can be alleviated by gifts to her children, but it is unlikely she would give enough, because she doesn’t know how much she’ll need in her later years.

Motobo does have a will, but because her estate is so large, Gagen recommends she create a family living trust to arrange the assets there and provide provisions for its management if something should happen to her while she is young. This is a difficult issue for Motobo, who is an only child and is not sure who could be the co-trustee for her estate.

“I have to think about this,” she said.

The final challenge is estate planning for a disabled child, and it involves careful coordination of outright property transfers, inheritance and public assistance benefits, Gagen said.

Motobo said she has tried hard to save enough for Danny so he will never need public assistance. He has not needed it so far. While Gagen agreed that is the best scenario, she said it would be best not to create an estate that does not allow for public assistance in case that becomes necessary.

While each disabled person’s situation is unique, Gagen recommended a trust for Danny rather than a guardianship. The trust will enable him to be a beneficiary of certain assets but also receive public assistance benefits, she said. Motobo will need to get a lawyer who specializes in creating such trusts.

What does Motobo get for her make-over? A blueprint that will keep her on track to meet her goals of saving for retirement, her children’s college educations and an estate for Danny. She also has the comfort of knowing she can still splurge on that sport utility vehicle.

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This Week’s Make-Over

Investor: Jackie Motobo

Age: 48

Occupation: Health-care administrator

Annual income: $62,500

Primary investment goals: Save for her retirement, pay for two younger children’s college educations, support the oldest child throughout his lifetime.

Current Portfolio

Stock funds:

Dean Witter Liquid Asset

PBHG Technology & Communications

Fidelity Growth & Income

Fidelity Growth Company

Putnam Voyager

Bond funds:

Dean Witter Diversified

Dean Witter Diversified III

Real estate equity:

$210,000 in primary residence

$200,000 in rental property in Mar Vista

Cash:

$16,000

Recommendations

Motobo has 85% of her non-real-estate investments in stocks, 15% in bonds and a small amount in a cash reserve that financial planner Neta Gagen did not include in her investment analysis because it is an emergency fund. Motobo needs to adjust her asset classes in order to protect her nest egg for the long haul and meet her retirement goals, Gagen said.

After selling her rental property and adding that $200,000 to her overall portfolio, Motobo will have nearly $600,000. With that amount, Motobo needs 18% in large-company growth stocks, 17% in medium-company stocks, 20% in small-company stocks, 20% in international companies and 5% in emerging markets. She should have 20% in bonds.

Motobo has sufficient college savings in three trust accounts for each of her children, but she should not put additional college funds there, Gagen said, as the money could make it tough for the children to get financial aid should they need it. For Danny, her child with Down syndrome, she needs to draft a trust that will allow him to retain ownership of certain assets while allowing him to receive public assistance benefits should he need it.

Recommended Portfolio

35% U.S. large-company stock funds:

Dodge & Cox Stock (800) 621-3979

Harbor Capital Appreciation (800) 422-1050

20% small-company stock funds:

Neuberger & Berman Genesis (800) 877-9700

Franklin Small Cap Growth (800) 632-2180

25% international-stock funds:

Vanguard International Growth (800) 662-7447

Templeton Developing Markets Trust (800) 632-2180

20% bond funds:

Vanguard Municipal Short-Term (800) 662-7447

Vanguard Muni Bond Intermediate-Term (800) 662-7447

Real estate:

$210,000 equity in primary home

Cash:

$16,000