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Heading for a life change
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September 18, 2000: 11:20 a.m. ET
About to leave the job he's held for decades, a sonar scientist takes stock
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Norwich, Conn., native Jim Pearson will soon make one of those "big life changes" people are always on your case about preparing for. So he's trying to make sure he's set up.
In three years, he plans to retire from his job as a scientist researching sonar systems for submarines. Since he's had the same employer - the U.S. Navy - for his entire career, it'll be something of a seismic shift.
 Pearson's wife is also switching gears. She's back at night school studying for an accounting undergraduate degree, which she expects to finish in 2002.
That might augment her day job at a radiology clinic, where she is an accounts-receivable and insurance-claims manager. She could even go free-lance during tax season, they figure.
The Pearsons are also well on their way to being empty nesters. Their daughter, Cathie Ann, 23, graduated from the University of Connecticut last year. Their son, Matt, 16, is in his second year of high school.
The couple had two unsuccessful attempts with financial planners - one was an insurance agent who just seemed interested in selling insurance, and the other lived too far away. So Jim Pearson has taken the financial planning on himself - finances are a hobby, and he's thinking about going into credit counseling as a second career.
He thinks it's time for a second opinion. "My question is, how are we doing and can we do something better?" he said.
A sizable pension to come
Pearson didn't expect to stay in his job so long. After college, he did a summer stint as an engineer at the Navy's New London, Conn., research lab.
He had just finished his math undergrad at Providence College in Rhode Island. But since it was 1969, and he'd been a ROTC, in the reserve officers' training corps, he knew he was headed for Vietnam. He shipped off as an Army first lieutenant.
 When he returned, he popped in at New London. "I went back down and they said the job is still open," he remembers.
He asked how long. "They said probably another year or two. Twenty or 30 years later, I'm still there."
When Pearson, 53, leaves his job, now 45 miles away in Newport, R.I., he'll get a federal pension in the form of an annuity.
It will be around two-thirds of his highest three years of pay, which at his current salary of $65,000 means he should receive at least $41,000 a year.
He won't get Social Security, but Catherine Pearson, 52, will. For 1999, the government's estimate was that she will be getting $6,600 a year once she's eligible.
Checks & Balances runs weekly. People with questions about financial planning are invited to write in explaining their financial goals. See the bottom of this article for specifics.
The Pearsons paid for their daughter's college education, and they anticipate doing the same for their son. Four years of tuition and expenses at a college like UConn will cost around $60,000, Jim Pearson says, based on Cathie Ann's experience. If their son picks a more expensive college, he'd have to get scholarships or take out loans.
So they're trying to build up education accounts. Jim Pearson sets aside $75 a week toward education expenses. But Catherine Pearson then withdraws a similar amount each quarter, at least until she finishes her degree.
Looking to move to into a smaller nest
After Matt Pearson moves on to college, the couple figure they'll shift into a smaller home. Pearson thinks they might look for a three-bedroom place instead of the five-bedroom Colonial they have now.
Their home is worth somewhere around $225,000. Just under half of that is equity -- the rest of the 15-year fixed rate mortgage, at 6.3 percent, will be paid off by 2013.
That means they should be able to make the move without seeing their payments go up. The three-bedroom homes they're looking at run $150,000-to-$200,000 in Connecticut. They cost about $100,000 more in Massachusetts, Pearson reckons. But Massachusetts doesn't charge income tax on federal retirees' pensions, so that's an option.
Likely to stay where they are
They have friends on the North Carolina coast, and they debate moving down there. Catherine Pearson is keen on getting back to Colorado, where her father, who was in the Air Force, was stationed three times.
But those are pipedreams. To be honest, Pearson says, they'll probably just visit there. They're settled now.
"We're New England born and bred. We'll probably die in New England also," he says. "We keep making other plans, but ... " he observes.
They figure they'll need 80 to 90 percent of their current cost of living in retirement. They want to travel in the United States and "live the good life."
Besides the pension, they have $140,000 or so stashed away in Jim Pearson's thrift savings plan and IRAs. Catherine Pearson should get a similar amount from her IRA and a profit-sharing plan through work.
They have more than $80,000 in nonretirement plans, too. Mostly that's in mutual funds like the Evergreen fund and the Putnam Global Growth fund. Jim Pearson has a $500,000 life insurance policy above the coverage he and his wife have at work, too.
Running out of planning time?
They plan on getting a new car when Matt Pearson starts driving. They'll probably hand him down the Ford Explorer that Catherine Pearson drives.
Maybe they'll get a Nissan Maxima, Jim Pearson thinks, since they don't need a family wagon like a minivan or S/UV anymore. They want to put down $15,000 and finance the rest.
Those are the small things. Mostly, Jim Pearson is thinking about leaving the job he's held all his working life. Between 55 and 65, he thinks he'll work at least part time, either in credit counseling, helping his wife with accounting or possibly at Foxwoods casino, which is four miles from his home.
"I don't have much time until I retire," he said. "Then I have to live off what I've saved."
What the planners say:
The Pearsons are a dying breed, Calvin Brown Jr., a Manassas, Va.-based certified financial planner, pointed out. They "are going to benefit from something that is rapidly becoming a dinosaur in American retirement planning: the monthly pension," he said.
Time was, retirement planning was a three-legged stool, he continued. The company pension, social security and private investments held you up. Today, it is a two-legged stool for the vast majority of Americans. And, half-joking, Brown makes it clear a two-legged stool is not very sturdy, "unless the legs are thick!"
The Pearsons are lucky to have a guaranteed income stream in retirement. But there are issues to consider, and most people tend not to address them until a few months before retirement, Brown said.
Thinking about a 'pension max'
For his pension, Pearson has elected to take a 10 percent reduction in the payments he'll get while alive. In return, his wife would get 55 percent of the payments were he to die before her.
Both Brown and Paul Hrisko, a certified financial planner in Cleveland Heights, Ohio, recommend that he review that option. They point out that he could take the full pension.
With some of the extra money, he could buy life insurance coverage that would roughly cover the lost pension in case of his death. Though Pearson isn't too happy with the life insurance his prior planner saddled him with, they should figure that into the equation.
Hrisko calls this strategy a "pension max." "He may want to review this," Hrisko said.
Brown adds another benefit of this pension max strategy. The Pearsons' children would inherit the life insurance if and when they both to die. The survivor benefit Jim Pearson has selected on his pension only applies to his wife.
Broadly diversified portfolio gets good grades
The Pearsons look set to enjoy this stage of their lives, according to Brown. Just with their current investments, they'd be set until they're 90, assuming a very modest 5 percent annual return.
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"There should be extra money available for traveling," Brown said. The planners are full of praise for their diversified portfolio. It's mainly stock, but that's OK for people their age, who can still be moderately aggressive, the planners believe.
What's more, Jim Pearson wants to work at least part time between 55 and 65. Assuming he makes at least $25,000 a year, and if his wife continues working, they will enjoy the same income they enjoy now, Hrisko pointed out.
Education costs likely covered if they keep at it
Their monthly expenses will probably drop a little when Matt Pearson heads to college. That should free up a little cash for the payments on a new car, Hrisko thinks. They should use non-IRA accounts to pay for the rest of the car, he adds.
The Pearsons have around $34,000 earmarked for education, half of which is in their son's name. It's invested in tools like a Fidelity utilities fund, an Eaton Vance municipal-bond fund and a Certificate of Deposit.
At first blush, that seems conservative to Hrisko. But on reflection he thinks that's wise. Their son is less than three years from college. Otherwise "a severe drop in the market would hamper their paying for his education," he said.
Hrisko runs some numbers. The $34,000, assuming a 10 percent return, should grow to $41,500, minus $3,000 for Catherine Pearson to finish her degree.
The Pearsons figure they'll spend $60,000 on Matt. That means $15,000 a year. Allowing for moderate growth on the balance and if Jim Pearson keeps contributing $75 a week, they should come close to funding the degree, Hrisko said.
Care about long-term care, planners warn
One area the Pearsons should address is long-term care, both planners believe. "At their age it is affordable and is a necessary component of any financial plan," Hrisko writes.
Jim Pearson says they're planning on getting around to that when they hit 55. He also has high hopes for a plan wending through Congress that might provide group long-term care coverage for federal employees.
Hrisko tells him not to hold his breath. "Typically, group-sponsored plans do not provide the comprehensive benefits that a personally owned plan does," he said.
Brown believes they should take out a long-term care policy but only on Catherine Pearson.
"To be blunt, men usually die first, and women usually care for them if they are incapacitated prior to death," he explained. "But when widows become incapacitated, they usually end up in nursing homes."
At $5,000 a month starting at age 70, all their investments would be wiped out by age 82, Brown works out. But a long-term care policy that pays out $5,000 a month would mean their money lasts indefinitely.
Time to get with the estate plan
Jim Pearson named his wife as beneficiary on almost all of his plans. But he is starting to review that idea and has named his daughter as the beneficiary on one IRA. It's good to be going through those steps and thinking about estate issues, Hrisko believes.
He recommends they consult an estate-planning attorney and look into trusts. They might want to retilt some of their assets not from an investment point off view but to make them easier to pass down.
Brown encourages the Pearsons to set up a living trust with "credit-shelter" provisions. That trust should eliminate estate taxes unless their estate grows to be very large, he says - or Congress changes the law. Pearson should then probably change the beneficiary on his financial plans to the trust.
With some tweaking, they are in good shape, according to the planners. But without making provisions like long-term care insurance, they run the risk of their family suffering if something untoward and unexpected happens, Brown concludes.
* Disclaimer
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