BOOM AND BUST : Hollywood’s Cyclical Gigs Can Play Havoc With a Guy’s Finances

Jack Nietzsche, a veteran boom operator in the entertainment industry, says that angling a microphone just right so it doesn’t spoil a shot is a piece of cake compared with juggling his finances.

Like many in his trade, Nietzsche, 37, goes from gig to gig. He can work for weeks without break on sitcoms such as “Cybill” and features like “River’s Edge,” then be collecting unemployment and scrambling for a new assignment when the production wraps. His gross annual income can range from $25,000 to $100,000.

“I’m a migrant film worker,” he says. “I can go for months without work.”

In the past, Nietzsche didn’t give much thought to building a nest egg, instead spending all his wages when times were good and living on borrowed money when jobs were scarce.

In the early 1980s, he found himself almost $60,000 in debt. It took years to pay it all off--just in time to discover that he owed the IRS an unanticipated $25,000.

“It cleaned me out. My hand shook as I wrote the check,” he recalled.

Today, Nietzsche is a new man--financially speaking. He has pared down his expenses, renting a small West Los Angeles apartment for $550 per month, and has traded in his European and Hawaiian vacations for weekend getaways to Northern California.

He’s maintained this more spartan lifestyle even as he’s reaped the benefits of Hollywood’s recent economic resurgence, working steadily and grossing $80,600 in 1995 and $72,000 last year, a figure that includes a $1,200 option on a screenplay he wrote.

Nietzsche tries to invest $300 a month plus his annual tax refunds. His portfolio includes $10,340 in a credit union money market account that he considers fallback money; $10,965 in the Dodge & Cox Balanced fund (five-year average annual return: 14.4%); and $10,420 in an American Express fixed annuity offering a guaranteed minimum return of 5%. He also owns about $1,350 in Mendocino Brewery stock.

His only liability? A personal loan for $2,770. Nietzsche took it out last month to consolidate credit card debt from overspending at Christmas. He expects to have that paid off by July.

Nietzsche said he had no idea if he had been saving enough for a “stress-free” retirement near his childhood home in Mendocino County. A union pension is still not a sure thing; to be eligible for even a minimal monthly stipend, he must put in 400 hours a year for 10 consecutive years on productions using union-represented workers. Nietzsche is currently working toward his ninth credited year.

In addition, he worries that a prolonged bout of unemployment could wipe out his savings.

Percy E. Bolton, a Los Angeles-based fee-only certified financial planner, reviewed Nietzsche’s finances and pronounced his concerns valid. Nietzsche’s emergency savings are inadequate for someone working in a boom-and-bust business such as entertainment, Bolton says, and his retirement savings are neither sufficiently diversified nor invested aggressively enough.

Three-quarters of Nietzsche’s portfolio is in fixed-income investments, about 20% overall is in large-company stocks (about two-thirds of the balanced mutual fund) and 4% is in the small-company beer firm.

Based on both conventional wisdom and Nietzche’s goals, Bolton says, he should put a far greater percentage of his assets in stocks and far less in fixed-income investments such as bonds and bank savings. (The rule of thumb when trying to decide on a proper mix of investment assets is to subtract your age from 100. The result is the percentage of your assets that should be in stocks. The rest can be in bonds.)

Continuing to follow this conservative investment style and relatively low rate of saving could land Nietzche in a real bind in his late 70s, Bolton said, even taking Social Security benefits into account. The audio engineer will need to either reconfigure his investments or downscale his retirement plans.

Bolton would like to see Nietzsche have 45% of his investments go into large-company stocks, 5% in small-company stocks, 10% in international stocks and no more than 40% in bonds. In addition, Bolton said, he should increase the dollar amount he saves for retirement until he is putting aside 10% to 20% of his annual income, or between $600 and $1,200 a month for that purpose. The amount should be automatically deducted from Nietzsche’s money market/checking account each month and can be adjusted as jobs come and go.

Why must he devote so much of his savings to retirement? Mainly because of the unpredictable nature of his work and the uncertainty over whether he’ll get a pension, and if so, for how much. And also it’s difficult for him to predict how much he might get in Social Security income.

Nietzsche must also boost his emergency savings, Bolton said. Ideally, he should have $25,000 reserved for this purpose--more than double what’s now in his money market fund. But Bolton said this doesn’t need to be Nietzche’s top priority, that he can raise this amount slowly, by earmarking financial windfalls such as tax returns and extra day work. “Everyone in the entertainment industry is essentially an independent contractor,” Bolton says. “If you have one year’s expenses set aside in such a volatile industry, you’ll feel good and not under pressure to take the first job you can get when you aren’t working.”

Increasing his savings to this level will reinforce Nietzsche’s resolve to live on less and will serve him well if he ever finds himself between jobs for a long period.

Will tightening the belt mean fewer trips to San Luis Obispo? “Sure,” the financial planner responded. “I think Jack--like most people--won’t totally understand money till it takes blood, sweat and tears to achieve savings. Traditionally, if it doesn’t hurt, you aren’t saving enough.”

Regarding large-company investments, Bolton recommends Nietzsche consider curtailing his investment in Dodge & Cox Balanced and turn to an index fund such as Vanguard Index Trust 500 Portfolio (five-year average annual return: 17.2%). An index fund is particularly suitable for Nietzsche because of his relatively high--38%--combined federal and state tax rate, Bolton said. That’s because, unlike funds where managers buy and sell shares frequently, incurring plenty of taxable gains along the way for their investors, index fund managers rarely sell shares. They simply buy all the stocks in a particular market index and hold on to them in an effort to match--not beat--market performance.

“It’s important for a portfolio to be sensitive to tax concerns as well as performance and risk,” Bolton pointed out. “A balanced fund is for someone with one fund only, but as Jack expands his portfolio, a balanced fund makes it more difficult for him to control how much of his money is invested in equities versus bonds.”

Bolton stressed that Nietzsche needs to begin investing in funds that specialize in international stocks.

Such a diversification move should help protect his assets when the U.S. market turns bearish, and Nietzsche would be giving himself a chance to profit, albeit with some risk, from the potential for high gains that foreign investments can offer.

For these, Bolton’s recommendations include T. Rowe Price International Stock (five-year average annual return: 11.6%), Vanguard International Growth Portfolio (13%), Warburg Pincus International Equity (12.5%) and Babson-Stewart Ivory International (10.3%).

Nietzsche should also add a small-company mutual fund--the small-company segment is now represented only by the stocks of a single company--the brewery. Nietzsche explained that he purchased Mendocino Brewing mainly to show support for local industry, not to add diversity to his portfolio. Bolton recommends T. Rowe Price Over-the-Counter Securities (five-year average annual return: 15.1%), Dreyfus New Leaders (13.2%) and Managers Special Equity (16.1%).

When it comes to bond purchases, Nietzsche must consider strategy, Bolton told him. Nietzsche could continue investing in his annuity, Bolton said, but he may want to consider one or more bond funds instead.

Bolton acknowledged that annuities do allow investors to accumulate tax-deferred assets, but said he advises his clients to be wary of them. Most come with high administrative costs that can eat up chunks of profit, and they have high surrender charges--fees assessed when you sell within the first five to 10 years--that make them much less desirable for an investor who needs flexibility. But Nietzsche told Bolton that because his working environment is so unstable, he likes having a guaranteed minimum return on at least one of his investments.

“A comfort level is critical for investing,” Bolton says. “Some people feel if they have a fixed annual return, they are more comfortable investing aggressively.”

To be properly diversified, Bolton said, “if Jack keeps the annuity, he would have to be 100% in equities outside of his annuity.”

Should Nietzsche later decide to investigate bond funds, the planner recommended considering federal-tax-exempt bond funds such as Vanguard Municipal Bond-Intermediate Term Portfolio (five-year average annual return: 7.3%), USAA Tax-Exempt Intermediate Term (7.1%) or Sit Tax-Free Income (7.3%).

All of Bolton’s recommendations take Nietzsche’s self-described “moderate” tolerance for risk into account. A more risk-tolerant investor would want suggestions for funds with a potential for greater returns.

Bolton also suggests Nietzsche consider placing his future emergency-fund savings in a tax-free money market account as another way to reduce his tax burden.

However, there are some things Nietzsche should not contemplate in an effort to cut his tax bill. For example, Bolton quickly reassured Nietzsche that it is reasonable for him to rent an apartment rather than buy a home.

Yes, owning a home would allow him to deduct the interest on his mortgage payments from his taxes, but it would be a large commitment for someone a variable annual income. What’s more, ownership can be a long-term burden.

“You need greater control and certainty over your income before you buy,” Bolton told Nietzsche.

Helaine Olen is a Los Angeles-based freelance writer and can be reached on the Internet at holen@aol.com

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This Week’s Make-Over

* Investor: Jack Nietzsche

* Age: 37

* Occupation: Audio engineer for television and film productions

* Gross annual income: Varies from $25,000 to $100,000

* Financial goal: “A stress-free retirement”

Current Portfolio

Nietzsche has $34,175 in investments and cash savings, divided as follows:

* $10,965 in the Dodge & Cox Balanced Fund

* $10,420 in an American Express Privileged Assets Annuity

* $1,350 in Mendocino Brewing Co. stock

* $10,340 in a money market fund

* $1,100 in a bank savings account

His only debt is a $2,770 personal loan.

Recommendations

Nietzsche should be investing up to 20% of his gross income--when he’s employed--for retirement. He can have the savings automatically deducted from his paychecks or checking account. He needs to add about $10,000 to his emergency fund. He also needs to add diversity, including funds offering higher returns, to his portfolio. Specifically, he should place 45% of his assets in a large-company index fund, 5% in a small-company mutual fund, 10% in a fund specializing in international stocks and 40% in his annuity or in bond funds.

Recommended Portfolio Options

Large Company Index Funds:

* Vanguard Index Trust 500 Portfolio (800) 662-7447

* Fidelity U.S. Equity Index Portfolio (800) 544-8888

* Federated Index Trust Max-Cap (800) 341-7400

Small-Company Funds:

* T. Rowe Price Over-the-Counter Securities (800) 638-5660

* Dreyfus New Leaders (800) 645-6561

* Managers Special Equity (800) 835-3879

International Stock Funds:

* Babson-Stewart Ivory International (800) 422-2766

* T. Rowe Price International Stock (800) 638-5660

* Vanguard International Growth (800) 662-7447

* Warburg-Pincus International Equity (800) 927-2874

Tax-Free Bond Funds:

* Vanguard Municipal Bond-Intermediate

Term Portfolio (800) 662-7447

* USAA Tax-Exempt Intermediate Term (800) 382-8722

* Sit Tax-Free Income (800) 332-5580

Meet The Planner

Percy E. Bolton is a Los Angeles-based fee-only certified financial planner. He was recently named one of the top 200 financial advisors in the U.S. by Worth magazine. He is a member of the Institute of Certified Financial Planners and a former member of the board, where he served as the group’s vice president. Bolton has bachelor’s and master’s degrees from UCLA.