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MONEY MAKE-OVER: Southern Californians Learning How
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Handbag Makers Hope to Fatten Purse for Retirement


Carlisle and Martha Lee Watson have been so preoccupied running their handbag business they haven't paid much attention to whether they're on track for retirement.

Like most entrepreneurs, their priority has been to keep their small business afloat. But now, as they reach their late 40s, they fear that their goal of retiring at 60 might be slipping out of reach.

The couple, who live in Los Angeles' Miracle Mile area on a combined annual income of about $120,000, have begun to realize that they can't live check-to-check forever. Their child-rearing expenses are almost finished--the younger of their two daughters recently graduated college--but their spending is still high.

"We make a good income, but we still seem to be treading water every year," said Martha, 47, who designs handbags, while Carlisle, 46, sells them. "We've been a little careless the last few years. We overdid the remodeling of our house, and we thought we'd make more money than we did. But we know how to make sacrifices. We just need to know what to do."

So far, the Watsons have $45,400 tucked away in separate IRAs. The funds are invested in two Morgan Stanley Dean Witter stock mutual funds, Treasury bonds and shares of Bristol-Myers Squibb, Dell Computer, Cheesecake Factory and Walt Disney.

They have about the same amount--$48,500--in a taxable brokerage account invested in eight stocks: Intel, Wal-Mart, Chevron, Deere, Cheesecake Factory, Schlumberger, Walt Disney and Hot Topic.

In addition, they have about $205,000 equity in their home and own inherited land worth $30,000. Subtracting debt, their net worth is about $300,000.

At this point they wonder if they'll be able to cut back to less stressful and lower-paying work when they hit their 60s.

Psychological as Well as Financial Challenges

Glenn Woody, a fee-only certified financial planner in Costa Mesa, responded bluntly: Not unless they start saving aggressively.

"The bottom line is that to get you retired, you'll simply have to tighten your belt and decrease your expenses," the planner said. More money can be found "in one of three ways: You earn more, spend less or a combination of the two."

He encouraged the couple to treat their finances as they do their business. Create a budget, then closely monitor their expenditures to identify areas to cut back.

"To me, wrestling with cash flow is like dieting," he said. "It isn't fun, but you're sacrificing for some later gain, which is intangible. It just gets down to motivation."

Self-employed people often have trouble finding time and the wherewithal to save for retirement, the planner said. While corporate employees often have 401(k) savings plans, people who are in business for themselves must set up their own retirement plans.

This can be particularly difficult when income varies from month to month, as the Watsons' income does. "It's hard to predict whether we're going to make $5,000 a month or $12,000," Carlisle said.

And saving for retirement can pose psychological challenges, of course. Although most people understand that they need to do it, it's easy to forgo saving and do things that provide immediate gratification. That's why the automatic paycheck deductions of 401(k)s and other work-based retirement programs are vital to many people's retirement planning.

Once self-employed people make a commitment to build a retirement fund, however, they have several good program options for tucking away money: a Keogh plan; a plan known as SIMPLE, which involves a savings incentive match for small-business employees; and a simplified employee pension, or SEP-IRA. The rules vary for each, but the central feature is tax-deferral on savings.

For the Watsons, Woody recommended that they each open a SEP-IRA and try to contribute the maximum to their plans. He selected that option because SEP-IRAs are easy to establish and have minimal reporting requirements and low costs.

Given their income, the Watsons would be allowed to set aside more than $8,000 a year each in investments within a SEP-IRA. (The basic SEP-IRA plan allows contributions of 13.04% of their net income, up to $24,000.) The plan can be started at any bank, brokerage or insurance company, sometimes for no charge.

After their SEP-IRAs are fully funded each year, Woody encouraged the couple to each contribute the maximum of $2,000 to a Roth IRA, the proceeds from which aren't taxed when withdrawn in retirement.

Any savings beyond that could go into a taxable account.

But even if the couple invest the maximum in their SEP-IRAs, Roth IRAs and $2,000 a month in their taxable account, they would barely be able to meet their retirement goals, assuming their investments return 10% annually, Woody said.

Although the U.S. stock market has returned more than 20% annually in the last three years, historical average returns for U.S. equities are 7% to 10%, depending on what longer-term period you consider.

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