Too Safe, and Sorry
Meet Wendi and Dave Wallerstein, arguably two of the most diligent savers in America.
At the tender ages of 31 and 33, respectively, they’ve already amassed savings of nearly $156,000. And they plan to continue setting aside roughly $40,000 annually to meet their near- and long-term goals.
Admittedly, they’re well-heeled. Between Wendi’s job as an insurance claims examiner and Dave’s sales and engineering position, they earn a tidy $150,000 annually. Still, their personal savings rate is nearly 10 times the national average.
Why would such well-to-do yet thrifty people volunteer for a money make-over? The Canyon Country couple worry that good intentions and savings discipline aren’t enough to help them attain typical American-dream goals: Buy a bigger house; pay for college for their two children, now 6 and 4; and finance a comfortable retirement. They are amateur investors who fear their money is poorly employed.
“We recognize that we’re at a point where we can really start doing something big with our savings, but we don’t know exactly what it is that we should do,” says Wendi, a workers’ compensation claims examiner in Woodland Hills.
Adds Dave, a regional sales manager and solar engineer for a solar energy systems manufacturer: “Finally we have more than a checking and savings account, but we don’t know what the big picture facing us is.”
In fact, Dave and Wendi do suffer from one financial foible: They’re too conservative.
They have roughly a quarter of their assets in bank accounts, money market funds and other very safe--and low-yielding--fixed-interest investments. About 50% is in so-called balanced and growth-and-income funds, which aim to reduce risk by dividing assets among stocks and income-producing investments such as bonds. The remaining 25% is divided among a variety of highly aggressive sector funds, international stock funds and aggressive-growth options. But because 75% of the Wallersteins’ portfolio is in relatively low-risk investments, their overall return is lackluster.
Because they’re still young, the Wallersteins can get far more aggressive without exposing themselves to undue risk. Even a major bear market shouldn’t deter them now.
“Time heals most investment wounds for those patient enough to stay the course,” says Norman M. Boone, a San Francisco investment advisor and personal financial planner who reviewed the couple’s case. “With 30 years to go before retirement, the Wallersteins can afford to take some risks in pursuit of higher returns.”
How much of a difference would shifting to higher-risk investments make? A portfolio 75% invested in lower-risk, lower-return investments such as the Wallersteins’ is likely to post average annual returns in the 7% range--at best. A portfolio invested primarily in stocks, on the other hand, would return closer to 10%, on average.
With the Wallersteins’ substantial savings, that 3% annual difference translates into a fortune--particularly when you take into account the amount of time before they’ll be tapping their savings.
Consider: Invested at 7%, the Wallersteins’ $156,000 alone would be worth $1.3 million in 30 years. However, if that amount could earn an average annual return of 10%, it would grow to $3.1 million.
Even accounting for significant dips in stocks, which Boone says have occurred in roughly one out of every four years, going with a 10% investment strategy pays off if you--like the Wallersteins--have enough time to ride out the cycles. Whether the current downturn in the market is just a dip or the beginning of a real bear market, the long-term strategy is unaffected.
Boone recommends that the Wallersteins put just 10% of their savings into bond funds.
The rest would go into domestic and international stock market mutual funds. All additional contributions for the near term should be similarly invested, he says.
In keeping with his aggressive posture, Boone recommends distributing that 90% as follows: 25% in small American companies, using the Baron Asset Fund (five-year average annual return: 20.04%); 25% in foreign stocks through the T. Rowe Price International Stock Fund (five-year average annual return: 11.64%); 20% in large American companies through the Vanguard Index Trust-500 Portfolio (five-year average annual return: 15.06%); 10% in the fledgling T. Rowe Price Emerging Markets fund (five-year average performance figure not available); and 10% in Cohen & Steers Realty Shares, a real estate investment trust (five-year average annual return: 18.09%).
For the 10% bond portion of their retirement savings, Boone takes a similarly aggressive stance, recommending that the Wallersteins split their investments evenly between high-yield bonds in Northeast Investors Trust (five-year average annual return: 15.9%) and foreign bonds in Standish International Fixed-Income (five-year average annual return: 10.59%).
Boone also urges the Wallersteins to contribute the maximum amount allowed of their pretax earnings into their respective 401(k) accounts, not just the amount their employers will match, for both maximum current tax savings as well as maximum tax-deferred interest earnings over the life of their plans.
Meanwhile, if the Wallersteins hope to fully pay the cost of sending both children to a four-year state university, they should set aside roughly $7,200 per year. If they’re aiming for a private college, the savings rate would have to be substantially higher.
How should the college money be invested? He recommends two funds: Skyline Special Equities (five-year average annual return: 20.74%), which invests in small American companies, and T. Rowe Price New Asia (five-year average annual return: 13.62%), a foreign stock fund.
Although retirement and college educations for their children will consume the bulk of their savings dollars, the most immediate issue for the Wallersteins is finding a new house. This matter is made all the more vexing by their estimate that selling their current home would net them about $163,000, nearly $18,000 less than the outstanding balance on their mortgage.
Neither Dave nor Wendi is willing to walk away from the mortgage obligations, because they believe it is irresponsible and because of the long-term damage it would do to their credit.
Boone wondered if they might rent out the house instead of selling it, a strategy that would work if the monthly payment would cover their expenses. But when the calculations were made, the Wallersteins discovered that they would “lose” as much as $600 a month on the rental option.
Although the Wallersteins could wait until the housing market bounces back, Boone doesn’t recommend taking that tack. By that time, he notes, a replacement house will cost even more. Instead, he recommends that they begin to aggressively pay down their mortgage.
By paying an additional $650 per month toward the principal, they can make up the $18,000 difference in two years. Since they can’t count on getting any equity from the sale at this point, Boone also recommends that they simultaneously begin to save aggressively, possibly as much as $1,800 to $2,000 per month, for a down payment on a new home. This money can also be invested in some of the same high-risk, high-return mutual funds he recommended for their retirement portfolio.
Following this strategy, he predicts, the Wallersteins should be able to sell their current home and purchase a new one within two years.
However, a protracted bear market could wreak havoc with this shorter-term strategy, which would certainly test the Wallersteins’ tolerance for risk and delay a move. So if a new house in the next few years is truly a top priority, they might decide to save for it with less risky investments.
On the other side of the coin, the Wallersteins can reduce the amount of money they have in savings and money market funds. Currently, they’ve got $25,000 of their non-retirement savings in bank and money market accounts. But they could probably pare that to just $10,000 for their “ready reserve account.” That amounts to about three months’ worth of family expenses, which is probably enough given their fairly stable jobs and lifestyle. However, if their jobs were less secure or if their lives were in flux, Boone would recommend they put as much as six months of expenses aside.
In addition, Boone recommends that the Wallersteins create a savings account for “planned major purchases” such as new cars, travel and home improvements. In general, given the family’s savings history and ability, Boone says the Wallersteins should not finance major non-housing purchases, since there’s no reason to spend money on interest when they have considerable savings. What’s an appropriate amount? Anywhere between $500 and $1,000 a month would provide a comfortable cushion.
Wendi and Dave, who met in high school and married shortly after her graduation from Cal State Northridge, say Boone’s plan brings focus and motivation to their investing. And they don’t predict any trouble with saving all that money.
The Wallersteins are currently able to save all of Wendi’s take-home salary of $2,700 each month, a total of $32,400 a year. In addition, they are willing to set aside a significant portion of Dave’s annual bonus, an estimated $30,000. Even in a difficult year, the Wallersteins say, they can easily sock away $40,000.
Sometimes, Wendi admits, they’ve spent money because they haven’t had a coherent savings plan. “Because we have the money, we sometimes just spend it,” she says.
“Our objectives were vague,” adds Dave, “so we weren’t as disciplined as we could be.”
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Carla Lazzareschi is The Times’ Money Talk columnist. She can be reached via e-mail at carla.lazzareschi@latimes.com
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
Investors: Wendi and Dave Wallerstein
Ages: Wendi, 31; Dave, 33
Occupations: Wendi, insurance claims examiner; Dave, solar engineer and regional sales manager
Gross annual income: $150,000, including bonuses
Financial goals: Purchase a larger home; pay for the college educations of their two children, A.J., 6, and Erin, 4; save for a comfortable retirement
Current Portfolio
Mutual funds:
$33,200 in Oppenheimer Main Street Income/Growth (Dave’s 401(k) rollover)
$11,400 in Oppenheimer Main Street Income/Growth (Wendi’s 401(k) rollover)
$11,400 in Oppenheimer Main Street Income/Growth (A.J.’s savings)
$2,000 in Dean Witter Global Growth Fund (Wendi’s 401(k) rollover)
$5,000 in Invesco Strategic Health/Science
$16,000 in Siemens 401(k) fixed-interest account
$16,000 in Siemens 401(k) balanced fund option
$25,000 divided 50% in Dreyfus, 25% in Dreyfus Appreciation, 25% in Dreyfus New Leaders (Wendi’s 401(k) with a former employer)
$5,000 in Cal Indemnity’s Emerging Growth
$5,000 in Cal Indemnity’s Income and Growth with a former employer
$1,000 in Wendi’s 401(k) with current employer
*
Cash:
$17,000 in a bank savings account
$8,000 in money market funds
Recommendations
Allocate 90% of their retirement savings into stock market mutual funds and 10% in bond funds.
Contribute the maximum amount allowed of their pretax earnings into their respective 401(k) accounts.
Set aside about $7,200 per year for the next 18 years to fully pay the costs of sending both children to a four-year state university.
Compensate for “upside-down” home mortgage by aggressively paying down the loan.
Create a “ready reserve account” of about $10,000, equal to about three months of family expenses, in a readily accessible account.
Create a savings account for “planned major purchases” such as new cars, travel and home improvements. Allocate between $500 and $1,000 a month to this account.
Recommended Purchases
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Five-year avg. Fund annual return* Phone number Baron Asset Fund 20.04% (800) 992-2766 T. Rowe Price International Stock Fund 11.64 (800) 638-5660 Vanguard Index Trust 500 Portfolio 15.06 (800) 662-7447 T. Rowe Price Emerging Markets Fund N/A (800) 638-5660 Cohen & Steers Realty Shares 18.09 (800) 437-9912 Northeast Investors Trust 15.90 (800) 225-6704 Standish International Fixed-Income 10.59 (800) 221-4795 Skyline Special Equities 20.74 (800) 458-5222 T. Rowe Price New Asia 13.62 (800) 638-5660
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* Morningstar data as of Jan. 31, 1996. NA: not applicable. Past returns offer no guarantee of future performance.
Meet the Planner
Norman B. Boone
Norman B. Boone is a certified financial planner in San Francisco. His firm, Boone & Associates, specializes in helping business owners, corporate executives and affluent individuals. He has an undergraduate degree from Stanford University and an MBA from Harvard University.
