Couple Get a Thumbs Up for How They’ve Handled Savings
Dale and Nora Wright are do-it-yourself investors who have worked hard to save for retirement, provide for their children’s education and still live well.
What they wanted is a second opinion to make sure that in doing it themselves, they’ve done it right.
“The last thing I want to do is work until I am 75,” declared Dale, who is 40. “That has been a big motivator for us to plan ahead and do as much as we can now.”
Fortunately, fee-only financial planner Howard Rothwell of Stepp & Rothwell in Overland Park, Kan., agrees that the couple are on the right track. Their plan mostly needs fine-tuning, he said, rather than an overhaul. Their only real misstep was in putting the college savings in the names of their children--Michael, 9, and Cierra, 6.
Dale is an Air Force officer making $56,500 a year, and Nora, 45, who recently returned to the work force, is a cost analyst earning $50,000 a year. The couple have accumulated $270,000 in investments, mainly in mutual funds but also in annuities and real estate.
Not that they’ve accomplished this by denying themselves. Rather, the Wrights have managed their money so they can have the things that really matter to them in the short term, too: a house, annual trips to the Philippines to visit Nora’s family, the freedom for Nora to stay home for a few years while their children were young.
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It helps that both are comfortable with numbers. Dale is a lieutenant colonel who administers contracts for the Defense Department and the National Aeronautics and Space Administration. The couple enjoy the challenge of investing. They have fun reading financial periodicals such as Money magazine, tracking their investments’ performance and comparing the characteristics of mutual fund families.
So what are they worried about?
“We always have that lingering doubt whether what we have done has us on the right path,” Dale said.
They needn’t worry. The Wrights are well along on the right path to reach their financial goals, Rothwell said.
In fact, “I think you have done really well,” he said of the couple’s investment program. “I would give you an A-minus/B-plus.” The one exception: The couple are saving too much in their children’s names, which could create problems when the kids apply for college financial aid.
A few years after Dale and Nora were married in 1986, they were investing as much as $1,500 a month toward retirement and their children’s education fund. Even when Nora left work for a few years and their income was cut nearly in half, they still managed to save upward of $950 a month.
“The ground rules were we would touch the investments last,” Dale explained about their success in saving. “We would cut everything else first--without any undue hardships--and then look at cutting the investments.”
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Part of their secret is that the family has been able to live on base--currently in San Pedro--for the last year and thus not had to pay for housing. However, the couple are considering settling in San Diego eventually, so in January they bought a $150,000 house there. For now, relatives reside there, and their contributions pay a portion of the $1,250 monthly mortgage obligation. The Wrights also have eschewed credit card debt. Their only other loan is the $14,000 on their 1997 Plymouth Voyager minivan.
“You have done the hard part: You are 40 and have close to $250,000 saved and are adding to it regularly,” Rothwell told the couple. “What you will see,” as time goes on and your investments continue compounding, is that “the money will start to do the work for you.”
The other big factor in the Wrights’ favor is that in two years, Dale will have 20 years of service with the Air Force and therefore be eligible to receive a pension of 50% of his final year’s gross salary. In addition, the longer the period before Dale retires from the military, the larger the percentage of his salary he’ll receive in pension pay. Of course, nothing would preclude Dale’s taking a civilian job after military retirement--and Dale has thought about that possibility.
For the Wrights, all this means that Dale wouldn’t even have to work till he’s 45 if he doesn’t want to. The couple could live comfortably--and still save for their children’s college--on Nora’s income, his pension and what they’ve saved so far. That’s not a scenario the couple has envisioned, but the point is that they have managed their money well enough so far that that choice would be open to them.
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But for planning purposes, the couple threw out a hypothetical plan in which they’d retire when he’s 52 and she’s 57.
With that in mind, Rothwell calculated that if they continue saving $700 a month toward retirement, and Nora starts saving $8,000 a year, or 15% of her salary, in her current employer’s 401(k) retirement plan, their non-real-estate nest egg will reach $900,000 in 12 years, assuming an average annual return of 9%. The after-tax income in retirement, plus Dale’s military pension, would give the couple a total retirement income close to what they are taking home now.
The bulk of the approximately $210,000 retirement-investment portfolio--about $170,000--is invested in mutual funds, with some of those in individual retirement accounts. About 80% is in stock mutual funds, and the rest is in fixed-income and cash. Rothwell agreed that that proportion is working for the couple, but added that if they become uncomfortable with such an equity-heavy portfolio as they get older, they can shift more of their money into fixed-income.
“For the most part,” Rothwell told the couple, “you have invested in large-company growth stocks, which has been either a brilliant strategy on your part or you were very lucky. That is where the best returns have been in the last three years.”
Actually, it was a little of both, Dale said.
However, Rothwell did recommend the couple drop a few laggard performers in favor of others in the same fund families that he believes are likely to do better.
Nora has about $98,000 in her IRA, a rollover from a previous employer’s 401(k) account, spread among four T. Rowe Price funds: approximately $31,500 in Equity Income (five-year average annual return: 18%); $30,000 in Blue Chip Growth (less than 5 years old); $27,000 in Mid-Cap Growth (five-year average annual return: 20.4%); and $10,000 in New Horizons (five-year average annual return: 17.5%), which invests in small-capitalization stocks. Nora should close out her position in New Horizons, Rothwell said, and put that money in T. Rowe Price Mid-Cap Growth instead. Looking at rates of return, especially for the last few years, he said, Mid-Cap Growth has consistently outperformed New Horizons.
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The Wrights have about $60,000 in four funds outside IRAs, all in American Century funds. The couple have about $31,000 in Twentieth Century Ultra (five-year average annual return: 18.1%), a growth fund; $15,000 in Twentieth Century International Growth (five-year average annual return: 16%); $5,000 in CA High-Yield Municipal Bond (five-year average annual return: 7.1%); and $9,000 in Value (not yet 5 years old).
“The performance of the Value fund has trailed off since inception,” Rothwell said. “During the last two years it has been in the bottom of its category”--large-company value funds. Rothwell suggested that the Wrights drop Value in favor of American Century Equity Growth Fund (five-year average annual return: 21.7%).
To achieve better diversification in their retirement savings, which also include about $12,500 Dale has in an IRA invested in USAA Income Stock (five-year average annual return: 14.4%), Rothwell suggested beefing up the couple’s international exposure from the current 7% to around 15%. He recommended using future savings to accomplish this. The new contributions to Nora’s 401(k) would be in line with an overall allocation of 80% stocks and 20% fixed-income.
Turning to saving for the children’s college, Rothwell had a few words of caution.
The Wrights have set aside about $41,000 so far--roughly $26,000 in American Century-Twentieth Century Giftrust (five-year average annual return: 10.5%) and $15,000 in USAA Cornerstone Strategy fund (five-year average annual return: 11.2%).
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What initially attracted many investors to Giftrust, Dale and Nora among them, was its extraordinarily high returns. However, it has stumbled badly of late--it took a 3% loss in 1997, when the average stock fund advanced 24%.
“The obvious problem is the small stocks it invested in have been way out of favor,” Rothwell said.
But Giftrust has unusual strings attached. Once the money is invested, it can’t be taken out for at least 10 years or until the recipient reaches the age of majority, whichever period is longer. Typically, as in the Wrights’ case, the account is set up for a young child to use when he or she turns 18 or so and heads to college. Another string is related to tax implications--and many investors aren’t aware of this one. Giftrust is not covered by federal gift-tax exemptions. Therefore, whatever amount is placed in Giftrust each year--whether it’s above $10,000 or below--must be declared to the IRS.
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Rothwell suggested that the couple stop contributing to Giftrust and put what’s in Cornerstone, an asset-allocation fund, into USAA Growth & Income fund (five-year average annual return: 16.4%) instead. Future contributions, the planner said, should go into the other mutual funds they already have. This is to keep as much of the college savings as possible in the parents’ names, which will put the children in a better position to receive financial aid.
In a final note, Rothwell had a tax-saving suggestion for the couple: Gradually move the $17,000 they currently have in certificates of deposit as the CDs mature. First, they should double their emergency fund--now $5,000 in a money market account--with $5,000 in CD money. The remaining $12,000 should go into the American Century CA High Yield Municipal Bond fund.
Dale had been thinking of the CD money as part of the family’s emergency fund, but Rothwell pointed out that the couple would incur penalties if they needed to withdraw a sizable sum, and CD earnings are taxable. Because Nora’s going back to work is pushing the Wrights into a higher tax bracket, they’ll come out ahead keeping that money in a tax-free bond fund instead. And the money would still be available to them fairly quickly should the need arise.
“The recommendations made a lot of sense to me,” Dale said of Rothwell’s suggestions.
The couple say they intend to research all of Rothwell’s advice to make sure they’d feel comfortable making any changes--and then continue on the financial path they have so carefully laid out for themselves.
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Lynda Natali is a regular contributor to The Times. To participate in a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Questions or comments may be left at (213) 237-7288. We cannot respond to all inquiries.
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This Week’s Make-Over
* Investors: The Wrights, Dale, 40 and Nora, 45
* Occupations: Dale, Air Force officer; Nora, cost analyst
* Combined gross annual income: $106,500
* Financial goals: Invest wisely for retirement and college educations for their two children, now 9 and 6
Current Portfolio
* Retirement accounts:
About $98,000 in Nora’s individual retirement account, spread among four T. Rowe Price mutual funds: Equity Income, Blue Chip Growth, Mid-Cap Growth and New Horizons. In Dale’s IRA, about $12,500 in USAA Income Stock
* Mutual funds: About $60,000 in four American Century funds: Value, Twentieth Century Ultra, Twentieth Century International Growth and CA High-Yield Municipal Bond
* Annuities: $16,000 in USAA variable annuity, $10,000 in Jefferson-Pilot fixed annuity
* Cash: $17,000 in certificates of deposit and $5,000 in a money market account
* Savings for children’s college: $26,000 in American Century Twentieth Century Giftrust, $15,000 in USAA Cornerstone Strategy
* Real estate: About $10,000 in equity in a $150,000 San Diego house
Debts: Owe $14,000 on 1997 minivan
Recommendations
* Investments need only fine-tuning. The couple should increase their international exposure and drop a few laggard funds.
* For college savings, stop contributing to Giftrust and put Cornerstone Strategy money into another fund. Future college savings should go into funds the couple already have and be kept in the parents’ names to maximize the children’s chances for receiving financial aid.
Recommended Mutual Fund Purchases
American Century Equity Growth (800) 345-2021
USAA Growth & Income (800) 382-8722
Meet the Planner
Howard Rothwell is a fee-only financial planner with Stepp & Rothwell of Overland Park, Kan. He has an MBA from the Wharton School of Finance, where he helped to develop the concentration in personal finance consulting.
