A Save Haven
For some, living within your means is about as realistic as sticking to a New Year’s resolution.
But for Manny and Celina Cervantes, it is truly a code to live by. The couple is passionate about getting the most out of their combined $71,700 annual gross income.
Celina, a 32-year-old bank operations officer, hunts for sales, clips coupons and buys in bulk at Sam’s Club. Manny, a 35-year-old mail carrier, is the kind of comparison shopper who can spend weeks visiting stores before finally deciding on a major purchase. They rarely buy on credit.
Their near-Olympian financial rigor extends to their savings accounts, too. Between Celina’s 401(k) retirement plan and Manny’s Federal Retirement Thrift Savings Plan, the family is saving $8,700 annually in pretax income for retirement.
In addition, they are contributing $400 a month to four Janus mutual funds. Three are growth funds--the namesake Janus Fund (five-year average annual return: 12.7%), Enterprise (less than 5 years old) and Mercury (less than 5 years old)--and the fourth, Worldwide (five-year average annual return: 17.7%), is a world stock fund. Those investments have allowed them to build up a $7,000 nest egg in addition to their work-related retirement plans.
Plus, they’ve been paying $100 a month more than required against the mortgage on their home in Norwalk.
Overall, then, this middle-income family is saving a bit more than 15% of its gross income.
If they continue saving at that rate, and assuming they continue getting decent rates of return, they will have $2.8 million in their retirement accounts within 30 years--the equivalent of $1.4 million in today’s dollars, said Kathleen Stepp, a fee-only certified financial planner based in Overland Park, Kan. That sum should give them more than enough to live comfortably in retirement and leave their children with a tidy inheritance too.
Manny and Celina Cervantes each arrived in the United States 20 years ago not speaking a word of English.
“I was 12 years old,” Celina recalls of that wrenching time in her life. “It was just horrible. I wanted to go back to El Salvador, where I had a maid and my own room.”
Thrust into a regular sixth-grade class, Celina learned English slowly but surely even as her classmates teased her mercilessly.
But her experiences have stood her in good stead, and today part of her job duties are teaching recent immigrants how to open and operate bank accounts.
“I wouldn’t change what I do for anything,” she says.
Manny was equally uncomfortable when his family arrived from Mexico around the same time, although he quickly picked up the new language.
By the time the two met in 1982, as tellers at the same bank, they were well assimilated to their new land. Celina soon moved to another job but stayed in touch.
“My best friend was still at the bank, and I’d call her,” Celina recalls. “Sometimes Manny would answer and we’d talk, and one day he asked me out. He proposed to me on the fourth anniversary of our first date.”
As adults, they have seen their share of financial hard times. Shortly after their 1989 wedding, they purchased a Norwalk home for $150,000--just before the Southern California real estate crashed.
As their residence was sinking in value, Celina, at the time in the middle of a difficult pregnancy, was fired from her job and was out of work for more than a year. She finally received a $25,000 settlement from her former employer in connection with her job loss. However, the money didn’t go far. A third went to the attorney who won her settlement, and the rest went to repay her mother, who had lent the couple the money for the down payment on their house.
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As if all these troubles weren’t enough, the couple then made a regrettable investment decision. A representative of a national brokerage firm sold them on the idea that the small amount then in Celina’s individual retirement account should be in a variable annuity, a long-term tax-deferred investment account.
But after they made that move, Manny began to read up on investments and decided that tax-deferred annuities were the wrong move for his family and that he wanted Celina’s IRA in mutual funds. To exit the annuity and regain control of the money, they were forced to pay high surrender charges.
“Between the high fees and the small amount of money, we were going nowhere,” Manny recalls. “But the good thing [the brokerage] did was get us on a program where we learned to put aside savings like we were paying a bill.”
Today Manny and Celina are in an excellent position to achieve their long-term financial goals.
Manny hopes to leave the Postal Service within 10 years to work full time at the landscape design business he is beginning to establish. Celina, who was not able to finish college because of a lack of money, doesn’t want to see the same thing happen to their children, Misty, 5, and twins Erick and Alex, 3. In addition, the couple would like to retire with homes in both the Los Angeles region and in Manny’s native Mexico.
The planner believes all those goals are realistic.
“If you keep up what you’re doing now for all of your working years, you’ll be just fine,” Stepp told them.
Stepp did suggest they make a few minor adjustments, however.
For example, Manny and Celina are paying the extra $100 a month on their mortgage because they want to build up equity in their current residence so that they can buy a new home in Cerritos within the next few years.
Stepp says the couple could get more bang for their buck investing that $100 instead. She estimates that the Cervantes’ 7.125% mortgage is costing them closer to 4.8% after taxes.
“You’re paying back cheap money when the money could be working harder for you elsewhere,” she explained. She suggests that they use the $100 to increase the family’s mutual fund contributions to $500 per month.
As for the Cervanteses’ mutual funds, Stepp says some tweaking is in order.
First, she would eliminate Janus Enterprise, which targets small- and mid-sized stocks but rarely invests in the health-care and technology sectors. It has simply been a lackluster performer, and Stepp believes the couple can do better. The money in that fund should be divided among the Cervanteses’ other Janus funds, she advises.
Manny and Celina should then add two “value” stock funds to their portfolio. These typically own shares of companies that are out of favor, pay high dividends, are generally conservative, or all of the above.
Such investments tend to outperform “growth” stock funds (such as the Cervanteses’ Janus funds) during down markets. That would provide a bit of portfolio insurance in the event that the U.S. stock market continues to decline.
Stepp particularly recommends Tweedy, Browne Global Value Fund (fund is less than 5 years old) and Third Avenue Value Fund (five-year average annual return: 17.69%), which has a top, five-star risk-adjusted performance rating from fund tracker Morningstar Inc.
“Value funds give you more diversification and different types of stocks,” Stepp explains. “1995 and 1996 were absolutely phenomenal years to be invested in the Standard & Poor’s 500 index [of blue-chip stocks], but that won’t always be the case.”
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As for saving money for college for the children, Stepp advised Manny and Celina not to open separate accounts for each child but, rather, to mentally apportion some of their monthly savings toward college expenses.
Why? If the funds are placed in their children’s names, the parents could lose control of the money on the child’s 18th birthday.
“Once they reach the age of majority, it’s their money. They can use it to buy a Harley-Davidson,” Stepp points out.
Although the planner thought it extremely unlikely that the Cervanteses could begin immediately saving the $700 a month needed to bankroll their three children’s educations in the University of California system, she still considered college a realistic financial option. Misty and the twins could very well be eligible for financial aid grants or loans. She also agreed with Manny that the children might attend a community college for two years before transferring to the more expensive state university system.
In light of Manny’s wish to eventually quit the post office, Stepp paid close attention to the couple’s retirement planning.
As a federal employee, Manny is eligible for a retirement annuity from the federal government, in addition to the tax-deferred, pretax savings he is accumulating in the Federal Retirement Thrift Savings Plan. Stepp, after considering the alternatives, recommended that when Manny leaves the Postal Service, he take control of both those retirement funds and roll them over into an IRA to manage himself.
She also recommended that Celina invest her 401(k) funds and Manny his Federal Thrift Savings Plan contributions entirely in stocks for now.
However, she urged Manny to be well prepared before he goes out on his own, building up his business slowly while still a mail carrier, and leaving only after he is established in his new field.
Manny agreed. He’s already beginning to purchase landscaping equipment and plans to seek work shortly on his days off with an established design firm in order to hone his skills. He also plans to buy a pickup truck that can easily do double duty transporting children or business supplies.
For lack of a better option, Stepp recommended that Manny take out an auto loan to buy the truck. But she urged the couple to think about a home equity line of credit--as soon as they have more equity--as their first choice in the event that they need to borrow. Because it’s a secured loan, the interest will be lower, and a home-equity loan may also be tax-deductible. She urged the couple to open such a credit line before Manny becomes a full-time landscaper. That way, if he initially earns less than he did as a mail carrier, the family will still have access to cash in case of an emergency.
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Finally, Stepp turned her attention to life insurance and other estate planning issues. Manny has $222,000 and Celina has $255,000 in life insurance through their employers, which the planner believes would not be enough to cover all the family’s needs in the event of an untimely death. She urged Celina to obtain an additional $150,000 and Manny an additional $300,000 in coverage, and recommended that the family contact USAA, a no-load, no-commission insurance provider, and price 10-, 15- and 20-year level-premium term insurance policies.
If they do this, the Cervanteses probably should also consult an estate planning attorney, since the value of their estate will be more than $600,000 and thus may be subject to inheritance taxes.
The Cervanteses pronounced themselves ecstatic with Stepp’s advice. Manny was especially gratified to hear a professional praise his frugal way of living and self-taught investment strategies.
“I always tell Celina we are sacrificing for the future. We want to be the people who, if they earn $50,000, only spend $45,000 and invest the rest.”
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)
This Week’s Make-Over
Investors: Manny and Celina Cervantes
Ages: 35 and 32
Occupations: Manny, mail carrier; Celina, bank operations officer
Gross annual income: $71,700
Financial goals: Save for retirement, for a new home and for college for three children, now ages 5 and 3. Manny would like to be in a position in about 10 years to work full time at his own landscaping business.
Current Portfolio
Celina: $5,400 in IRA, in Janus Fund and Janus’ Worldwide, Mercury and Enterprise funds; $11,500 in 401(k)
Manny: $60,200 in Federal Retirement Thrift Savings Plan
Both: $7,000 in savings evenly divided among Janus funds listed above; about $5,000 in home equity
Recommendations:
Celina should continue contributing 15% (the maximum allowed) of her pretax income to her firm’s 401(k); Manny should continue contributing 10% of his pretax salary (the maximum allowed) to the Federal Retirement Thrift Savings Plan. Both retirement accounts should be fully invested in equities.
They should stop exceeding the required mortgage payments on their current home and, instead, put more money into mutual funds.
If Manny leaves the Postal Service before he turns 56, he should withdraw the money in his federal retirement funds, roll it over into an IRA.
If the couple wish to finance in full a University of California education for each of their three children, they need to begin saving a total of $700 a month for that immediately.
Sell Janus Enterprise Fund, and divide the proceeds among their other Janus funds. In the future, allocate monthly contributions equally among their three remaining Janus funds and the two value funds to be added to their portfolio.
Manny should obtain an additional $300,000 in life insurance; Celina, an additional $150,000. Consider other estate planning matters within the next 12 months.
Recommended Purchases
Tweedy, Browne Global Value Fund, (800) 432-4789
Third Avenue Value Fund, (800) 443-1021
USAA Life Insurance, (800) 531-8000
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Meet the Planner
Kathleen Stepp, a fee-only certified financial planner, is the president and founder of Stepp & Garrett Inc., based in Overland Park, Kan. She advises individuals in all phases of personal finance planning and serves as vice president of education for the national board of the National Assn. of Personal Financial Advisors.
