Prenuptial Agreements

By Debora Vrana

Nov. 19, 1996 12 AM PT

Neil McGurty is making one of the biggest changes in life: He’s getting married.

And if that isn’t enough, the part-time college instructor and graduate student is moving with his wife-to-be to the Baltic state of Latvia, seeking a good-paying job teaching English.

Now, as with any young couple just starting out, McGurty, 31, and his fiancee need to prepare financially. They must begin planning now if they want sufficient retirement savings, a down payment for a home, and children.

“I’ve never thought much about any of these things--retirement, life insurance, bonds, mutual funds,” said McGurty, who lives in Ontario, Calif., with his parents while his fiancee attends a university in New York.

As are many younger couples about to be married, McGurty and his fiancee are too caught up in the rush of romance and life to spend a lot of time discussing the nuts and bolts of their finances and long-term goals. McGurty said he hadn’t yet told her about the nearly $15,000 he owns in stocks or the amount of his cash savings.

Before they get married in July, the couple will need to get money issues out in the open, or money problems could come between them later, warned Robert Keats, a certified financial planner in Phoenix.

The different spending and saving habits of each spouse could put a lot of stress on the marriage, he said. That can be defused by discussing how much they will save early on, and that in turn will determine the amount of money they can spend.

“She’s never had any money,” said McGurty of his fiancee, Iveta Silova, a 23-year-old Latvian he met while he was a Peace Corps volunteer. Silova graduates from Columbia University’s Teachers College in New York this spring.

“I think she knows even less than I know about all this stuff,” McGurty said. “Frankly, we just haven’t had any time to talk about this.”

That needs to change, said Keats, a fee-only financial planner who specializes in “cross-border planning” for those living abroad.

“You and your wife will need to plan together, figure out what your assets are, set priorities and prepare for the future,” he told McGurty.

McGurty thinks they will move back to the United States and will want a home here in about five years, but he doesn’t know when they will have children because they haven’t discussed it. The decision about children will make a dramatic difference in the couple’s finances.

To get on track financially, a couple needs to plan and set realistic target dates for major life events, Keats said.

Because he doesn’t expect to buy a home for five years, McGurty has time to get a good nest egg together. He already has some savings and no credit card debt, which will help him purchase a home. He has saved $34,000 in low-yielding bank certificates of deposit.

He also has nearly $15,000 in five single-company stocks, some of which were gifts from family members. They are Chevron Corp. shares worth $4,000, Bank of Santa Maria shares worth $8,000, Compaq Computer shares worth $1,300, Sunrise Medical shares worth $900 and Ascend Communications shares worth $500.

His car is paid for, and his debt largely amounts to a $11,000 student loan at 8% interest that won’t come due until 1998.

It’s important that the couple establish a regular savings plan straightaway, Keats said.

First of all, McGurty needs to set up an individual retirement account for 1996 and put $2,000 in it each year, or roughly 10% of his expected salary. For McGurty, the contributions can be tax-deductible because his expected annual income is under the federal cutoff level for that benefit. While abroad, he should continue putting money in the IRA on a nondeductible basis, because his foreign-earned income is not likely to be taxable, and then, assuming his earnings remain at a similar level, on a tax-deductible basis when he returns.

That money should all be earmarked for retirement savings.

To buy a home, the couple will need to save even more. They should aim for a 20% down payment, meaning they’ll need at least $20,000, Keats said.

Each month, McGurty and Silova should put aside $500 or as much as they can of their salaries in a separate account earmarked for a house.

“It’s going to be tough, but if both of them are working, they should be able to save another $10,000 a year for a house,” Keats said.

Once in Latvia, McGurty expects to make about $25,000 a year teaching English, although neither he nor Silova knows how much they’ll actually earn.

As do many recent graduates facing a scarcity of good entry-level jobs in today’s climate of corporate downsizing, the two think teaching English abroad will be a way to boost their careers and make a transition to more lucrative posts.

“Whether or not we stay depends on whether our opportunities pan out,” McGurty said. “To be honest, we don’t know what’s ahead for us in Latvia.”

As part of preparing for marriage, McGurty needs to set up a will that names his wife as his beneficiary, which will save his estate a lot of trouble should anything happen to him, said Keats, who recommends he do that before leaving the United States.

Life insurance is also important for McGurty, said Keats, who recommends a no-load universal life or no-load 10-year convertible-term insurance policy that will cost about $200 to $1,000 a year for a $200,000 policy.

“Now that he’s getting married and going to a foreign land--especially a Baltic state like Latvia--he needs to be prepared,” Keats said.

Next, McGurty needs to consider the tax implications of his move abroad. As a U.S. citizen, he’ll need to file an income tax form next year, but under current law, up to $70,000 of his foreign-earned income will be tax-free.

McGurty’s expected salary of $25,000 is quite a lot of money for Latvia, said Keats, adding that the per-capita income there is $2,000 a year. Considering that McGurty would be in the 15% tax bracket in the United States, his Latvian salary would be equivalent to a $29,500 salary here.

“Because you can exclude that income, you should pay no U.S. taxes,” said Keats, who advised the couple to look into whether they will need to pay any Latvian taxes.

McGurty also needs to overhaul his current investments, Keats said, pointing out that his current portfolio of five single-company stocks is much too risky for him.

Keats recommends that McGurty sell all five stocks he owns and instead put 70% of his investment money in stock mutual funds and 30% in cash reserves and bonds. This more balanced yet aggressive portfolio is well-suited for a younger person just starting out, he said.

McGurty said he’s hesitant to sell his single-company stocks, especially his Chevron and Bank of Santa Maria stocks, which have performed well for him. But Keats cautioned that having a portfolio of single stocks, even some top-quality stocks, is much too risky for someone in his financial condition.

“One bad stock could suddenly put you in a negative position,” Keats said. “It’s a lot better to go with grandma’s old rule: Don’t put all your eggs in one basket.”

To invest in individual stocks, an investor needs a portfolio of at least $250,000 to be properly diversified, Keats said. Even owning a few blue-chip stocks is too risky for someone such as McGurty, who cannot afford to lose his investment.

Once McGurty sells the stocks and combines that with his cash holdings, he will have a portfolio of about $49,000. He should set aside $11,000 in a bank CD to pay off his student loan when it comes due, which would then leave him with about $38,000.

Of that, Keats recommends he put $8,000 in a fixed-income fund such as Templeton Global Income (current yield of 8.00%; five-year average annual return of 7.90%). It’s a so-called closed-end fund whose shares are currently selling at a 15% discount below its net asset value. A closed-end fund sells its shares on a stock exchange. Because this fund has a short maturity of five years and holds high-quality government bonds, it’s unlikely its share price will fall any further, Keats said.

Buying this fund will give some diversity and stability to McGurty’s portfolio, he said.

McGurty should take the remaining $30,000 and put $15,000 in Janus Worldwide (five-year average annual return: 18.69%) and the other $15,000 in SoGen International (five-year average annual return: 12.06%). Both are no-load funds poised to benefit from emerging markets and should give McGurty a more diversified portfolio yet still be one that is positioned for growth.

After diversifying, McGurty will of course need to monitor his investments from abroad. To do that, Keats said, he should open an Internet-based brokerage account that will allow him to access his account 24 hours a day and do online trading from Latvia. Because he already owns a computer he’s comfortable with, learning how to trade online shouldn’t be a problem for McGurty.

So what does McGurty get from his make-over?

A blueprint for his financial future, something that may make his marriage stronger in the future and his life easier, Keats said.

“This will all be a topic of discussion for us in December when she is out here for Christmas,” said McGurty. “We have a lot of planning to do.”

Debora Vrana is a Times staff writer. She can be reached at debora.vrana@latimes.com

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Meet the Planner

Robert F. Keats is a certified financial planner in Phoenix who specializes in “cross-border” tax issues and foreign nationals. He has been a planner for 21 years, eight in Canada and 13 in the United States. He is a partner in the firm Keats, Connelly & Associates Inc.

This Week’s Make-Over

Investor: Neil McGurty

Age: 31

Expected annual income: $25,000

Primary investment goal: Prepare for impending marriage and living abroad. Start saving for a home.

Current Portfolio

Stocks:

$4,000 Chevron

$8,000 Bank of Santa Maria

$1,300 Compaq Computer

$900 Sunrise Medical

$500 Ascend Communication