Their Saving Grace

Look at Bertie and Beverly Chawla’s portfolio and you’d think they are financial wizards. But they would deny it.

“Even though I work in a bank, I’m a civil engineer,” says Bertie, 34, a vice president of construction services at Bank of America. “I don’t know much about investing--or where to invest or how to go about doing it.”

Beverly, 33, a part-time assistant librarian at Cal State Fullerton, says of estate planning: “It interests me not at all.”

And yet the young parents of a 3-year-old girl and an infant boy have managed to build an impressive nest egg of nearly $200,000 while accumulating virtually no debt other than the $1,378 monthly mortgage on their four-bedroom house in Walnut.

“They’re on the right track,” says Percy E. Bolton, a Los Angeles-based fee-only financial planner who reviewed the Chawlas’ situation. “To be in your early 30s and have this type of savings and no debt, and a wife who works only part time--how many families can do that?”

This family does it by living modestly and saving about 20% of their combined annual income of $100,000. But they don’t pinch pennies, the couple insists.

“I’m not a big consumer by nature, but I don’t consider myself to be frugal,” says Beverly. “I don’t feel like we’re missing out on anything. We’re still able to go on very nice vacations.”

For example, they still eat out, generally once or twice a week.

Adds Bertie: “It’s not like we’re miserly. I drive an 11-year-old Toyota Camry to work, but we bought a new minivan last year.”

They’ll take the van to Yellowstone this summer.

Mostly, the Chawlas have built their nest egg by tucking away savings in Bertie’s 401(k) plan, a retirement account that grows tax-deferred through payroll deductions and that also reduces the couple’s taxable income.

It’s so simple that it’s almost mindless, they say.

“Once the money starts going out of your paycheck,” says Bertie, who contributes the maximum 15% of his salary to the plan, “you don’t even notice it. And the power of tax-free compounding is just wonderful.”

Beverly calls it “shocking” to watch the balance grow.

Still, there is some room for improvement with the Chawlas’ asset mix, says Bolton. The couple need to shuffle their assets a bit, reducing some of the risk in their current portfolio as they continue to save for what they hope will be an early retirement and for their children’s college education.

Of the money in Bertie’s 401(k) account, the major holdings include about $33,000 in BankAmerica Corp. stock, $30,000 in a large-cap stock index mutual fund, $20,000 in a mid-cap stock index fund and $17,000 in a balanced fund. Within the same account, $7,500 is invested in a Treasury bond index fund, $7,100 in an income fund, $6,700 in a money market fund and $6,400 in an international stock index fund. He also has $25,000 in a company pension fund.

Surprisingly, given her husband’s enthusiasm for pumping up his 401(k) plan, Beverly began contributing to her 403(b) retirement account only last year and earmarks less than half the allowable 25% of her salary to the plan. She has only $4,000 invested so far, and all of it is in T. Rowe Price Equity Income (five-year average annual return: 17.5%).

“It was just something we overlooked,” she says. “We realize now it was crazy not to put more money into it.”

Outside their retirement accounts, the Chawlas have $6,000 in Warburg Pincus International Equity fund (five-year average annual return: 13.3%) and $3,000 in Warburg Pincus Emerging Growth (five-year average annual return: 17.9%). They hold about $2,000 worth of Black & Decker Corp. stock, $2,000 worth of 3Com Corp. stock and about $21,300 in cash reserves.

As for their savings for their children’s college educations, they have $3,200 invested in Fidelity Blue Chip Growth (five-year average annual return: 20.1%) for their daughter, Tara, and $2,500 in Vanguard Index Growth, which is less than 5 years old, for son Aaron.

It’s an aggressive mix--the great bulk of their assets are in stocks. Bolton says aggressiveness is advisable for a couple who will probably continue working for at least 20 more years.

“They know they’re in this for the long haul,” the planner says. “They have the right viewpoint in terms of time horizon.”

Still, he says the Chawlas could maintain the same rate of return and reduce their risk by not relying so heavily on large-cap U.S. equity holdings, which account for more than 50% of their portfolio.

He recommends that they increase their holdings in small-cap and international funds so that their mix is 36% in large-cap equities, 30% in international equities, 10% in small-cap equities and 24% in broad domestic fixed-income accounts.

“They want to retain a certain rate of return, but they’re fairly inefficient right now because they’re so heavily involved in the large-cap equity side,” Bolton says. “And when you invest most of your money in just one asset class, you’re taking more risk than you need to take.”

They could reduce risk further by decreasing their holdings in individual stocks, including the BankAmerica shares. Since future income and other employee benefits are already riding on the success of the company, why tie so much of the value of a retirement account to the same factors, the planner says.

Bolton also recommends that Bertie, as the family’s major breadwinner, increase the value of his life insurance from $250,000 to $450,000, which would cost an additional $350 or so each year.

To fund their children’s college years, the Chawlas should add about $50 a month to each of their accounts, which at a projected 8.5% rate of return would leave nearly $50,000 for their educations, Bolton says.

The couple probably doesn’t need to hold more than $10,000 in cash for emergencies, Bolton says. But Bertie plans to keep twice that amount in reserve for the moment after racking up about $10,000 in medical bills over the last year. Bertie is hoping that his insurance company will pick up at least a portion of the payments, leaving him with some extra money to invest.

Having a financial reserve available to cover certain tests or procedures that health insurance doesn’t cover makes sense for people who want to decide for themselves what is “medically necessary.”

Bertie also wants to be in a position to care for his parents back home, in his native India, in case they run into financial difficulty.

That’s something his children probably won’t have to worry about.

If the Chawlas continue to save as they have and continue to enjoy a not-unrealistic 8.5% return on their investments, they’ll have a tidy $2.4 million when they retire, the planner says. For a couple who maintain they don’t really know what they’re doing, they’re not doing half bad.

*

Jerome F. Crowe is a Times staff writer. He can be reached by e-mail at jerry.crowe@latimes.com.

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This Week’s Make-Over

* Investors: Bertie and Beverly Chawla

* Ages: 34 and 33

* Occupations: Bertie, bank vice president; Beverly, assistant librarian

* Gross annual income: $100,000

* Financial goal: Save for early retirement; pay for the college educations of their two children, Tara, 3, and Aaron, 3 months

*

Current Portfolio

* The bulk of the couple’s retirement savings are in Bertie’s 401(k) plan, invested in large-cap, mid-cap and international stock mutual funds; a balanced fund; bond funds; and a money market mutual fund. About $33,000 of the 401(k) is invested in the stock of his employer, BankAmerica.

* Beverly’s 403(b) retirement account of $4,000 is invested in T. Rowe Price Equity Income Fund.

* The couple has about $19,000 in non-retirement investments, some of which are for their children’s college educations. These are in Warburg Pincus International Equity fund, Warburg Pincus Emerging Growth fund, Fidelity Blue Chip Growth fund and Vanguard Index Growth fund; and in shares of 3Com and Black & Decker.

* Cash reserves amount to $18,000 in a bank savings account and $3,300 in money market fund.

*

Recommendations

* Increase Bertie’s life insurance to provide a $450,000 death benefit; current insurance death benefit is only $250,000.

* Re-balance portfolio to reduce emphasis on large-company stocks. That can be accomplished mainly by having Bertie reapportion the investments in his 401(k). The couple should also reduce their holdings in individual stocks, particularly the BankAmerica stock. The family’s livelihood is largely dependent on the bank’s future. To have so much of their retirement riding on it as well is unwise.

* The couple should, then, aim to divvy their invested assets as follows: 36% in large-cap stocks and mutual funds; 10% in small-cap stocks and stock mutual funds; 30% international equity funds; 24% in broad domestic fixed-income funds.