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When a Cool Million Still Isn't Enough

November 12, 1996|Debora Vrana

Pam Donner wants to get a life.

A life that doesn't demand 12-hour workdays managing real estate assets. A life that includes time for golf weekends in Scottsdale, Ariz., vacations with close family members and, eventually, a comfortable retirement on $100,000 a year.

While other workaholic baby boomers may have similar goals, Donner, 44, is different. With an estimated net worth of $1.6 million, Donner actually has the wherewithal to make her dreams come true--if she continues to add to her wealth and overhauls her investments now to make sure they are sufficiently diversified and properly positioned to carry her through the next 40 years, said certified financial planner Tim Kochis in San Francisco.

Kochis, who reviewed Donner's investment portfolio, said the news is good, but not all good.

First, the entrepreneurial Donner is in an enviable position. Her savvy, long-term financial planning, successful career and heavyweight portfolio of valuable real estate assets have given her a strong cushion of retirement savings.

"I started out with nothing," said Donner, who has only a high school degree, "but I took my bonuses and always reinvested in real estate. I managed to save $25,000 every year."

She earned her net worth through hard work as a property manager--only $22,000 of her wealth was inherited--and by taking calculated risks in real estate that eventually paid off big time.

But it was taking an even bigger risk at age 37 that helped Donner create the wealth that most Southern Californians only dream of. When the property management firm Donner was working for decided to sell a small division, Donner was able to buy the assets and turn it into a successful small business.

Single and with no children, Donner was able to save more than most. She didn't get much financial help from family members, including her father, a retired federal wildlife agent, and does not receive any alimony from her ex-husband, whom she divorced more than 10 years ago.

Another plus: Donner estimates that her one-third stake in her Newport Beach real estate company is worth about $1.3 million, and she earns an annual salary of $100,000 plus bonus. She has $67,000 in money market accounts, $79,214 in stocks and an additional $216,000 in real estate equity, including two small apartment buildings in Riverside and San Bernardino and a home in Colorado.

Now the bad news.

Although Donner might seem awfully wealthy, to achieve her goal of retiring on $100,000 a year in today's dollars, she still needs a lot more money and needs to work full time for 10 more years, Kochis said.

That's because of inflation, something many investors just don't consider when they plan for retirement, he said. Factoring for inflation, the $100,000 in today's dollars will be a much higher amount by the time Donner can retire.

Considering a conservative 3% inflation rate, the $100,000-a-year income she has now will be $138,000 in today's dollars by the time Donner is 55, Kochis said. When Donner is 70, that $100,000 will amount to $216,000 in today's dollars. By age 80, it will be $290,000.

"People planning for retirement don't give appropriate thought to what even a small amount of inflation will do to them," Kochis said. "They think they are rich with $200,000 invested in CDs and munis. That won't get them through."

This means Donner will have to work until age 55, maximize her investment returns and put aside an additional $50,000 a year until 2006 to meet her goal. She will need to more than double the assets she has now, to $3.2 million pretax, if she hopes to retire comfortably and still leave something behind for her brother's three children.

Most of all, she should rely somewhat less on real estate investments, although they've gotten her where she is today, Kochis said.

She also should drastically change her investment habits to develop a portfolio of liquid assets that will see her into old age.

Too much of her wealth is in real estate and all in the same region, making her assets vulnerable to environmental disasters, economic swings or other problems, Kochis said. Her investments could be difficult to sell if she suddenly needs cash for an emergency.

"She needs to put her investments on a more automatic pilot in a diversified portfolio of equities if she wants to free up her time," Kochis said. "She is so involved in all this real estate."

There's just one problem. Donner is afraid of Wall Street. She likes sticking to real estate because it's her area of expertise.

"I don't understand the stock markets," she said. "If I lose my shirt in an apartment building deal, at least I understand why. If I lose my shirt in a stock deal, I don't even know what happened."

Many investors feel the same way, Kochis said. Whether it's real estate, gold, stamps or antique cars, many investors are more comfortable sticking exclusively with investments they know, often to their peril.

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