Separate Styles Put Finances Out of Joint

By HELAINE OLEN

April 22, 1997 12 AM PT

Jean Mills and John Orcutt believe they’ve discovered the secret to maintaining a happy marriage: separate finances.

The couple, married 12 years, jointly gross $107,000 annually. But they maintain individual checking accounts and try to split expenses equally.

Mills, 40, buys the groceries and pays the child-care bills for their children, Justin, 7, and Katie, 3. Orcutt, also 40, picks up other household costs and the rent. The couple’s only joint holding is a condominium in Mar Vista that they purchased in 1988 and now rent out.

“I don’t question Jean about her purchases, and she doesn’t question me about mine,” explains Orcutt, an assistant grocery store manager. “I know it sounds strange, but we’ve grown comfortable with it--and it prevents arguments.”

It also prevents joint financial decisions.

“We are doing separate retirement savings, and we’re not looking at it jointly,” Orcutt admits. “We have no unified plan.”

But the couple’s lack of financial coordination could lead to financial catastrophe, warns Brent Kessel, a fee-only certified financial planner based in Santa Monica. At the heart of Kessel’s concern are Mills’ and Orcutt’s wildly differing investment strategies.

Mills, an assistant vice president and loan officer for a bank, considers herself a cautious investor. She’s accumulated $62,000 in her individual retirement accounts, divided among three U.S. large-company stock mutual funds: Fidelity Equity-Income II (five-year average annual return: 15.8%), Berger 100 (five-year average annual return: 11.3%) and Dreyfus Third Century (five-year average annual return: 12.8%), a vehicle for socially conscious investors.

She also has $12,500 in a bank certificate of deposit.

Orcutt has pursued a more ambitious and unconventional strategy.

An avid reader of financial magazines and newsletters, he has over the years been attempting to earn average returns of 20% per year by “timing” the market and moving his assets in and out of individual stocks, mutual funds and gold.

Right now, taking his cue from James Stack, publisher of the InvesTech Market newsletter in Whitefish, Mont., Orcutt is bearish about the stock market’s prospects. The $43,000 in Orcutt’s IRA and his cash savings of $11,000 are currently parked in money market accounts, earning low rates of interest.

Their cars are paid for, and they have no credit card debt.

Kessel doesn’t approve of Orcutt’s investment strategy, but he lauded the couple’s savings habits.

“You deserve congratulations on your financial discipline,” he says. “It’s rare to see a couple your age, living on the Westside, with two children, with absolutely no credit card or car loan debts.”

In addition, Kessel made a special point of complimenting Orcutt on placing the security deposit the couple received from their condo tenant into a separate account.

“Most people would spend the money and deal with paying it back when the tenant moved,” Kessel noted.

The planner also agreed with the couple’s decision not to sell their Mar Vista property for now, because they believe it will one day increase significantly in value. Even though Orcutt and Mills are taking an after-tax loss of $173 a month on the unit, selling it now for its estimated worth of $115,000--almost $40,000 less than the purchase price--would cost $14,561, taking into account closing costs of 6% and paying off the mortgage.

Still, the planner maintains that separate finances have allowed Orcutt and Mills to sweep some difficult money matters under the rug. Like their children’s college education, for instance. Mills wants to start saving now to send the kids to a four-year state university. Orcutt doesn’t think that’s necessary, believing that the family can handle those bills as they come in.

The couple also disagree about where they should live.

They are renting a Culver City house for $1,400 a month. They were surprised when Kessel informed them that their monthly housing tab could decrease significantly if they purchased a home costing $259,000 or less. After their mortgage and property tax deductions, he said, a $259,000 home would cost them $1,200 a month--leaving a comfortable $200-a-month cushion for home repairs or improvements.

Mills, motivated by what she believes are Culver City’s better schools, pushed for the move to that community in 1995. She would like to see them start saving to buy a home in their current neighborhood. Orcutt, however, wants to move back to the condo.

“John seems to think we’re spending too much on housing and that we should make do with the condo and save money. But it’s too small for two children and has no backyard,” Mills said.

Aside from hindering their ability to make major financial decisions, the couple’s separate-but-equal approach to finances also makes for confusion. For instance, Orcutt had been under the impression that the family was not saving enough money. But the planner pointed out that that was not the case, that Mills had saved more than $10,000 last year from her salary alone.

“I think it’s fine, to some extent, to keep financial destinies separate. But you need to talk occasionally and make sure both of you are both heading in the same direction,” Kessel told the couple. “Money has a huge amount of power in this culture, and I would hate to see your marriage run into trouble because of a lack of communication.”

Kessel’s main concern is that Orcutt’s love of risk could run the family’s financial ship aground. No matter how they decide to handle the education question, “You don’t want to tell your kids that they can’t go to college because you bet on the wrong biotech stock in 1997,” the planner said to them.

Kessel devised a financial plan for the couple that takes their divergent appetites for financial risk into account. Based on Mills’ willingness to accept, at most, a 15% overall portfolio loss in any given year, he urged her to completely revamp her retirement investments.

Only 20% of her funds should be in U.S. large-company stocks, Kessel said, and he recommended that half that large-company sum should be in “value” stocks, typically high-dividend, lower-risk issues. He recommended the Vanguard Index Value stock fund (two-year average annual return: 23.2%) or the new O’Shaughnessy Cornerstone Value, launched last fall.

Because Mills indicated that she wished a portion of her savings to remain in a “socially responsible” fund, one that does not invest in the tobacco or defense industries, the planner suggested that the other half of her large-stock allocation go into Domini Social Equity (five-year average annual return: 15.7%).

He pointed out that not only does Domini have a better history of returns than her Dreyfus fund, but the latter has been criticized in the past for what some think is inadequate social screening.

Kessel suggested spreading the remainder of Mills’ portfolio among mutual funds in numerous asset classes: U.S. small-stock (15%), international large stock (8%), international small stock (8%), emerging markets (4%), real estate investment trusts (5%), a U.S. short-term bond fund (20%) and a global short-term bond fund (20%).

He also urged her to begin contributing the maximum allowable amount to her firm’s 401(k) retirement plan when she becomes eligible to do so this summer.

A number of the mutual funds Kessel recommends for Mills are no-load “index” funds such as Vanguard’s Index Small Cap Stock (five-year average annual return:13.5%), International Equity Index Emerging Markets (two-year average annual return: 16.7%) and Bond Index Fund Short-Term Portfolio (two-year average annual return: 6.6%).

Index funds simply attempt to mimic the performance of a stock or bond index such as the Standard & Poor’s 500 or Wilshire 5,000 and thus have low expenses and require little active management. They are thus perfect, the planner said, for someone who, like Mills, prefers a low-maintenance approach to investing.

“Checking out my funds once a year sounds great to me,” Mills said.

Given his druthers, the planner would have created a similar retirement investment strategy for Orcutt. Kessel said the 60%-stock/40%-bond strategy he mapped out for Mills should produce average annual portfolio returns of around 12%.

(That figure may be a bit optimistic for returns over the very long term, however, because the stock market’s stunning performance of late has been far above historical returns. According to Ibbotson Associates of Chicago, that mix of stocks and bonds has produced an average annual return of 8.9% over the last 70 years.)

But Orcutt indicated that he wants to strive for 20% annual returns, so Kessel’s asset mix would be significantly more conservative than Orcutt would like. So Kessel came up with an alternative: Orcutt should put 50% of his money in a U.S. small-stock fund, 40% in an international small-stock fund and 10% in an emerging-markets stock fund.

If Orcutt wants to continue investing on hunches or newsletter gurus’ recommendations, Kessel said, he should set aside only a small portion of his money to be risked that way.

Kessel argued that most people in the couple’s financial position are best off keeping their investments in mutual funds. “Placing money in mutual funds, compared to a few individual stocks, is, to me, a no-brainer. You are diversified into . . . [many] small stocks, and if you stick with it and ride the down years when you can lose 30% to 40%, you could end up with 20% annual gains” if your funds perform well, he said.

Orcutt acknowledged the merit in Kessel’s argument but said that he would have a hard time following that advice, admitting, “I just don’t know if it’s enough risk for me.”

Mills appears resigned to her husband’s speculative approach to retirement savings.

“It’s his vice,” she said with a shrug. “He’s not spending money on beer. Between the two of us, I’m sure it will even out to some decent return.”

Kessel urged the couple to set priorities and begin to invest jointly. The questions of whether to buy a new home and whether to contribute to the children’s college costs must be decided on jointly, and soon.

“Funds for education and housing should be democratically controlled. I think it’s important you keep some money together,” Kessel said.

He estimated that the couple would have to start saving $375 a month to put the kids through college. Those funds should be invested in a manner similar to Mills’ retirement savings, and the couple should remember to take inflation into account and increase the amount they save as they go along, the planner said.

If the couple want to come up with a 20% down payment for a $259,000 home in, say, two years, they will need to save $2,255 per month. Of course, they could reduce their monthly savings toward buying a home if they are willing to wait longer to move.

Because their housing savings will be money they will be needing in the near future, the planner suggested that they invest it in a money market fund, where it will be safe from the vagaries of the stock market. Their current money market and CD savings should not be used for the down payment but, rather, should be earmarked as emergency savings.

Mills and Orcutt should look at their new joint approach to saving and investing as a way of strengthening their relationship, the planner says.

“I know it’s hard to let go sometimes. But when the financial commitment goes deeper, the intimacy goes deeper as well because there’s more trust,” Kessel told them.

Los Angeles-based freelance writer Helaine Olen is a regular contributor to The Times. She can be reached on the Internet at holen@aol.com

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Meet the Planner

Brent Kessel is a fee-only certified financial planner based in Santa Monica. His firm, Abacus Financial Planning, manages funds for individuals, small companies and charitable foundations

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This Week’s Make-Over

Investors: Jean Mills and John Orcutt

Ages: 40

Occupations: Orcutt, assistant grocery store manager; Mills, assistant vice president and loan officer for a bank

Gross annual income: $107,000

Financial goals: Save for retirement, for a down payment on a new home and for college for children Justin, 7, and Katie, 3

Current Portfolio

* Mills: Mutual funds (IRAs): $62,000 divided among Dreyfus Third Century, Fidelity Equity Income II, and Berger 100. Cash savings: $12,500 in a certificate of deposit

* Orcutt: $43,000 in a money market IRA; $11,000 in two money market accounts

* Together: Own a condominium in Mar Vista purchased in 1988 for $152,500; current estimated value is $115,000

Recommendations

* Coordinate separate finances and make joint decisions on long-term goals.

* Because the couple would have to sell their condo at a loss, they should hold off on that for now.

* Orcutt should contribute the maximum possible to his IRA, and Mills should contribute the maximum possible to her 401(k) when she becomes eligible for that benefit.

* Orcutt should invest the bulk of his savings in stock mutual funds, setting aside only a small portion for individual stock picks and other choices based on market timing.

* If the couple begin a college fund now, they should attempt to save $375 a month.

* When they decide to begin saving for a down payment on a home, open a separate money market account for that purpose.

Recommended Mutual Fund Purchases

* U.S. large stock: Mills 20%; Orcutt --; Family 10%

O’Shaughnessy Cornerstone Value (800) 797-0773

Vanguard Index Value (800) 662-7447

Domini Social Equity (800) 762-6814

* U.S. small stock: Mills 15%; Orcutt 50%; Family 22%

Dreyfus Small Company Value (800) 645-6561

Vanguard Index Small Cap Stock (800) 662-7447

DFA U.S. 9-10 Small Company Portfolio (310) 395-8005

* Real estate investment trusts: Mills 5%; Orcutt --; Family 2%