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  Will They Be Ready?

Patricia Ann Smith, 47, Arlington

Job: Self-employed musician.

Annual earnings: Approximately $27,000.

Sources of retirement income: Social Security, IRAs, possibly income from a union pension fund, and possibly income from an annuity.

Other assets, savings and investments: A house worth approximately $285,000 to $300,000 and approximately $155,700 in mutual funds, certificates of deposit and money-market funds.

By Martha M. Hamilton
Washington Post Staff Writer
Sunday, September 26, 1999; Page H5

Patricia Ann Smith plays the viola with the Washington Chamber Symphony and plays from time to time with the National Symphony Orchestra. She is also the director of the Madison Ensemble, which plays at weddings and other events. But as a freelance violist, her income is erratic.

She lives in a large house, but has reduced her monthly mortgage payments through several refinancings and doubts that moving someplace smaller would reduce her housing costs significantly.

Smith said that she was prompted to think harder about her own planning for retirement as a result of spending time with someone who was older and who had virtually no retirement savings. “That made me think, ‘Gee, I’m further ahead than he is,’ but it made me think I should go back and start reviewing mine.”

Martha Priddy Patterson took a look at Smith’s finances. Patterson is the director of Employee Benefits Policy and Analysis for KPMG’s Compensation and Benefits practice. She is also author of “The Working Woman’s Guide to Retirement Planning: Saving and Investing Now for a Secure Future.”

First of all, said Patterson, Smith needs to know what she can expect in the way of Social Security payments; what, if anything, she can expect from her pension, and the terms of a small annuity that currently provides her with slightly more than $1,000 a year.

She can obtain the information on Social Security benefits by filling out a “Request for Earnings and Benefit Estimate Statement” (Form SSA-7004). Smith is covered by the musicians’ union pension plan, but expects to receive little if anything from it because it has so many restrictions on being vested and penalties for breaks in service.

Nonetheless, said Patterson, Smith needs to understand the pension rules well enough to make sure that she is not losing benefits unnecessarily. For instance, said Patterson, if the plan requires a certain number of weeks’ work per year to qualify, it might pay to take a week-long job that wouldn’t be attractive otherwise if it helped her to qualify.

Patterson’s main recommendation had to do with how Smith has been investing. She said she was impressed with the amount—nearly $156,000 that Smith had managed to save and invest on her relatively low salary. But most of her savings and investments are in low-risk, low-return instruments—$94,000 in certificates of deposit and money-market funds.

“Given the erratic nature of her income, I can see why she would want more money in cash equivalents for an emergency,” said Patterson. But there is a way to manage that money to produce better returns, she said. “She needs to take that money and ladder her CDs,” she said. By that, Patterson meant that she should buy a five-year CD, followed by a four-year, three-year, two-year, one-year and six-month CD. In six months, when the short-term CD matures, she should put that money into another five-year CD. The idea is to have CDs that mature at intervals of six months to a year one after another but that earn the higher rates available for longer-term investments.

Patterson, who stresses that she is not a professional financial planner, also thinks Smith might invest more in the stock market through mutual funds with good longer-term (five- to 10-year) returns.

“Given her income,” Patterson said, “the wise financial decision would be—particularly now that her home could sell for a very high value—would be to very seriously consider selling her home and buying a smaller apartment or home and investing the money she makes.”

“Nothing is more important than peace of mind and happiness and living day to day,” said Patterson. Those considerations might rule out selling the house, she said. But, in evaluating this option, Smith should consider that “it’s not just the mortgage payment, it’s the real estate taxes, heating the place, painting the place.” Selling the house might yield $50,000 or so to invest for the future.

© Copyright 1999 The Washington Post Company

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