With a Threat of Serious Illness, Retirement Savings Take Priority

At 45, nurse Cynthia Fowler wants the usual things in life--a nice home, a retirement plan, a college fund for her 3-year-old granddaughter.

Oh, and one not-so-usual thing: a crystal ball to reveal how the latent hepatitis C virus in her body will affect her future.

Fowler was exposed to the virus more than 10 years ago while working as an emergency room nurse. Some people with hepatitis never suffer major complications. But in 70% of cases, it leads to chronic liver disease, causing fatigue, weakness and nausea. In 15% of cases, it causes cirrhosis, the third most common cause of death in the U.S. for people age 45 to 65.

The day she learned she’d tested positive for the virus, “I was so distressed I went home,” Fowler recalled. “I started to realize this disease could kill me.

“But then, as I’ve made peace with myself, I also realized I could live the rest of my life without any serious consequences. So my whole attitude is to live every day to the fullest and healthiest.”

But how can she plan her financial future against a disease that could make it impossible for her to work long before she has enough money to retire?

To do that, she must think of herself first, said financial planner Jill Hollander of Berkeley.

“You can’t afford to be putting money into a college fund for your granddaughter right now,” Hollander said. “It may appear you’re being selfish today, but you’ll be helping your family in the long run because you’ll have enough money to take care of yourself.”

Fowler has about $134,000 in savings, mostly for retirement, and her focus has to be on building those funds as much as possible.

“Normally, if somebody hasn’t saved enough for retirement they can cut back on their expenses or work a year or two longer,” Hollander said. “But Cynthia can’t count on that because she may be too sick, or she may have a lot more expenses.

“Her major problem is that she doesn’t have any wiggle room.”

If she’s forced to stop working before her retirement funds are sufficient, Fowler has options but each has limitations.

For example, worker’s compensation through her former employer will pay all her medical expenses. That’s crucial, because she already visits a doctor every three months for blood tests--and recently had a liver biopsy and ultrasound--to monitor the virus. And her doctor wants to start her on pegylated interferon, a new hepatitis C drug treatment.

But worker’s comp won’t pay living expenses or lost wages because of illness.

She also has disability insurance through her job as an occupational health nurse, but it pays only 66% of her present salary and has restrictions on drawing benefits.

California State Disability Insurance pays people a small portion of their salary when they can’t work because of nonwork-related illness or injury. But those benefits last for only a year, and Fowler’s weekly salary of $1,136 would become an SDI benefit of just $54 a week.

The state insurance can help a little if Fowler suffers from chronic liver disease and can’t work for several weeks at a time. Californians can file a new claim each time they’re unable to work, as long as they don’t collect benefits for longer than a year.

If Fowler becomes too ill to work at all, she could be eligible for Social Security Disability, which pays the equivalent of what people would receive from Social Security when they turn 65. But the recipient must be “severely disabled” and meet other eligibility requirements, such as giving evidence that they can’t work another, less strenuous job.

The bottom line: Fowler can’t afford to depend on outside help to cover her bills if she becomes disabled before 65.

That means Fowler has to figure out ways to reduce her spending so she can increase her savings. Until recently, she was spending more than her monthly take-home pay of about $3,000, making it hard to save much beyond the $245 a month she contributes to her 401(k).

Two things happened in September that eased her financial problems. She inherited $20,000, which allowed her to pay off a $7,000 third mortgage that cost $77 a month. And Dale McIntyre, 55, her boyfriend/fiance of 17 years, moved into her Port Hueneme townhouse. He’s unemployed and receives disability checks from the Veteran’s Administration, but contributes $500 toward her $1,200 monthly mortgage, and pays half the food and phone bills.

“So far it’s working out fine,” Fowler said. “We’ve stuck by each other for all these years, and he does anything he can to help me out.”

Fowler’s living expenses aren’t extravagant. Her mortgage and house-related expenses total about $1,600 a month. She works in Santa Barbara and the commute and car maintenance cost her $250 a month. Her phone and utilities are another $250, and she spends $225 eating out and $200 for groceries.

She and McIntyre like to take weekend trips with her granddaughter, which cost about $100 a month, and then there are the irresistible gifts for her granddaughter and co-workers that average about $50 a month.

Previously, she tried to save $100 a month to build an emergency fund, but usually ended up raiding the fund every few months to cover expenses. But with McIntyre sharing expenses, Fowler can save about $400 a month. She’d like to use the extra money to double her 401(k) contribution to 10% of her salary, or about $490 a month. And she plans to put what’s left from her inheritance into an emergency fund and start regularly building on that.

If Fowler continues saving at her current rate of about $6,200 a year--which includes a $2,000 401(k) match from her employer--she’d still have trouble making ends meet if she had to stop working at age 60. She’d have only about $770,000 saved by then, assuming 8% growth on her investments. In such a case, she probably would have increased medical expenses and, even with Social Security benefits kicking in later, probably would deplete her retirement savings in about 10 years.

On the other hand, if she stays well, Fowler would have $1.1 million for retirement at 65, assuming 8% growth on her investments.

“The moral of the story is there’s risk, significant risk, if you become ill,” Hollander said. “The more you save and the less you spend, the bigger cushion you build and the more you can have go wrong with your health and still have a safety net.”

Hollander recommended that Fowler open a money market account with Vanguard to get the best interest she can on her emergency fund. Ideally, the fund should be big enough to cover three to six months of expenses, or $9,000 to $18,000, the planner said.

She also recommended that Fowler consolidate three retirement accounts from previous jobs into a single individual retirement account, and divide the money among seven Fidelity mutual funds. And she suggested that Fowler rebalance the fund allocations in her 401(k) plan.

Investing in a taxable account, such as a mutual fund, would make it easier for Fowler to withdraw her money if she were to become ill. But Hollander favors a 401(k) plan because of the ability to invest pre-tax dollars on a tax-deferred basis, and because of her employer’s matching contribution.

Moreover, if Fowler becomes disabled, the IRS will permit her to make early withdrawals from her IRA without penalty.

Finally, Hollander recommended that Fowler find a fee-only financial planner with whom she can develop a relationship.

‘It’s especially critical for someone like Cynthia to get a planner now,” she said. “Otherwise, if something happens, you’re asking somebody to step into the middle of a hurricane with no clue it was coming.”

*

Jeanette Marantos is a regular contributor to The Times.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investor: Cynthia Fowler, 45

* Annual income: $59,000

* Goal: Save for retirement and still be able to support herself if she becomes too ill to work

Current Portfolio

* Cash and savings accounts: $5,000 in a credit union savings account

* Retirement accounts: $129,000 in four funds (three with former employers)

* Other investments: 68 shares of Home Depot stock

* Other assets: $200,000 townhouse in Port Hueneme; 2000 Toyota Camry Solaro

* Debt: $120,000 on her townhouse; $30,000 second mortgage

Recommendations

* Consolidate three retirement accounts from previous jobs into one Fidelity IRA; put 23% in Fidelity U.S. Bond Index, 14% in Fidelity Spartan U.S. Equity Index, 25% in Equity Income II, 10% in Fidelity New Millennium, 12% in Fidelity Diversified International and 8% each in Fidelity Low Priced Stock and Fidelity Small Cap Stock.

* Put at least $5,000 a year in her 401(k), with 20% in Merrill Lynch Retirement Preservation, 20% MFS Bond fund, 20% in Merrill Lynch Global Allocation, 30% in Merrill Lynch Equity Index and 10% in Van Kampen Emerging Growth.

* Move her emergency savings into a Vanguard money market account to get higher interest, and continue putting at least $100 a month into that account.

* Have a fee-only financial advisor review her finances at least once a year to make sure someone is familiar with her situation if she does become ill.

Meet the Planner

*

Jill Hollander is a fee-only certified financial planner and registered investment advisor with Financial Connections in Berkeley.

Los Angeles TimesWhere to Go for Help

The California Employment Development Department has information about state disability insurance at its Web site (www.edd.ca.gov/fleclaim.htm#di ). The agency has offices in Los Angeles, Industry, Long Beach, Riverside, San Diego, San Bernardino, Santa Ana, Santa Barbara and Van Nuys. Call (800) 480-3287 or (800) 563-2441 TTY/TTD.

For information about the Social Security Administration’s disability program, go to www.ssa.gov and click on Disability Information, or call (800) 772-1213.

Source: Times research