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Age 71, and taking too many risks

June 24, 2011: 5:33 AM ET
Susan Berne is 71 and taking too many risks with her investment portfolio.

Susan Berne is 71 and taking too many risks with her investment portfolio.

(Money Magazine) -- Like many retirees, Susan Berne is always on the lookout for ways to make her savings go further. Trouble is, with bonds and cash paying so little, Berne has been drawn into riskier investments.

Based on tips she's picked up from CNBC's Jim Cramer and others, she's invested $10,000 in nearly a dozen stocks.

She bought a complicated variable annuity from a broker she knows with $45,000 in her IRA.

And two years ago Berne, 71, put $25,000 into a nontraded real estate investment trust, or REIT (again, a broker's idea). With a 5% yield, it pays nearly twice as much as a 10-year Treasury does, but her principal is tied to the ailing real estate market.

It's not quite as bad as the $2,000 she invested in a Pong arcade machine in the 1970s, but close.

Still, while Berne is adventuresome -- she and her sister traveled to Indonesia in 1998 just as a revolution was erupting; "we never left the airport," she recalls -- she's not reckless.

After working for 20 years in immigration services for the U.S. Department of Justice, Berne, who is divorced, receives a $30,000-a-year pension (with a cost-of-living adjustment).

An immediate fixed annuity she bought for $50,000 pays her $4,350 a year. She has about $17,000 in the government's thrift savings plan. Besides a 5.4% fixed-rate loan on her home in the Memphis area, she's debt-free.

She is also a caregiver for her 93-year-old mother, who resides nearby in an assisted-living facility.

The Help Desk: Answers to all your money questions

Berne handles her mother's portfolio, the bulk of which (some $500,000) is in the stock of her former employer, Kimberly-Clark (KMB, Fortune 500). The stock yields a healthy 4%, and the dividends plus Social Security and a pension cover most of her care.

It's a concentrated portfolio, to say the least, but Berne fears that selling now would mean a higher tax bill than if she waited until her mother's death, when she and her sister, who will split the estate, would qualify for a stepped-up cost basis.

With so many decisions to make about managing her money, Berne says it's time to get help, especially since she wants to ensure that she never has to rely on her two grown daughters or sister.

"Other than from a friend -- and I admit that's not a good way to invest -- I've never gotten advice," she says. "I need to simplify."

THE ADVICE

Celia Brugge, a financial planner in Memphis, says that with a few changes Berne should be able to live comfortably on her pension and portfolio -- plus get back to Indonesia for a real vacation.

Ditch the variable annuity. Berne is paying 2.4% a year, plus fees for the underlying funds. "That's a lot to take off the top," says Brugge. Shift into low-cost index funds. She's owned the annuity since 2005, so she'll no longer face the surrender charges she would have had to pay if she'd withdrawn funds in the first six years.

Stick with bonds. Even though bonds drop in value when rates rise, Berne must keep at least a portion of her portfolio in fixed income; compared with stocks, bonds are historically less volatile.

Since Berne's pension and fixed-annuity payments cover the bulk of her living expenses, however, she can own a healthy serving of equities too.

"Susan can take a little more risk for her age because most of her income is guaranteed," says Brugge, who suggests a mix of 55% in stocks and 45% in bonds and cash.

Keep the REIT -- for now. Berne would have to accept a 40% loss on the $25,000 she invested in the REIT if she sold. Plus, as a private investment vehicle, the REIT limits redemptions to 5% of total outstanding shares per year. If other owners are cashing out, she might not even be able to sell now.

Diversify Mom's money. "I do worry that there's so much tied to one company," says Berne. Her mother could take $20,000 or so in long-term capital gains without incurring a tax bill this year and next.

High medical expenses, which she can deduct, keep her taxable income low, and the extension of the Bush tax cuts through 2012 means the long-term capital gains tax rate is 0% for those in the lowest tax brackets.

Another tactic: Hedge against losses with options. But that, Berne notes, "seems like the opposite of simple."

Have fun. Berne wants to hang on to her stocks. "It's my fun money," she says. Those shares make up less than 10% of her portfolio, so Brugge says that's okay -- especially if owning stocks keeps her from buying a Pong machine.  To top of page

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