Ambitious Couple Are Comfortable but Restless

To look at Jamey and Lea Gottlieb, you’d think they are a couple who could pretty much be satisfied with the status quo: They’re not yet 30 and they enjoy a six-figure income, own a four-bedroom home whose grounds are tended by a gardener and even belong to one of L.A.’s most exclusive social clubs.

But they’re ambitious and willing to take on challenges.

Jamey, a senior manager of corporate communications for game-software company Activision in Santa Monica, believes an MBA would enhance his career prospects and help him move from public relations to marketing, a field he feels would hold more potential.

“Having an MBA will help me get to the senior management level in marketing,” said Jamey, 28, who sees himself as perhaps a brand manager for a packaged-goods company. “That way, there’ll be no hindrances when I’m going against others for a job.”

The couple have other goals too: short-term, to get Lea, 29, a nice but not fancy used car; medium-term, to make about $15,000 worth of improvements to their Westchester home; long-term, to start a family and establish a fund for their children’s education.

Achieving all of that will take teamwork, an ability to set priorities and a willingness to forgo immediate gratification.

Fortunately, the Gottliebs have those things going for them too, said Carolyn Person Taylor, a fee-only certified financial planner in Del Mar, Calif., who was impressed with the couple’s financial savvy and commitment to buckle down and save when necessary.

Lea, who met Jamey in 1991 while they were students at UCLA, fully supports her husband’s decision to return to school.

“I think it’s a good idea, and if he’s going to do it, he should do it before we have kids,” said Lea, who received her own MBA from UCLA in 1994 and now works as a senior business manager for the office of student affairs at USC.

While Jamey is in school, the couple may have to live on half their $118,000 annual income. “We’ve been in crunch mode before,” he said, “and our salaries were a lot less than what we’re making now.”

Indeed, the couple saved $12,000 for their 1995 wedding and $15,000 for the down payment on their home, which they bought last year. Furthermore, Jamey really enjoys investing. He logs on to the Internet often to research mutual funds and track the couple’s retirement-plan choices.

So far, at least, the home has been the couple’s best investment. They bought it for $295,000 in August 1997, and it was recently appraised at $380,000. But it is also the investment most demanding of their income--requiring monthly mortgage payments of $2,292.

The couple also have $19,600 in various tax-deferred retirement plans with current and former employers, invested largely in equity funds, and have $14,500 in checking and savings accounts. Beyond what they’re putting in their workplace plans, the couple are saving about $1,000 a month.

The main question for Taylor is how the Gottliebs should go about planning to get what they want. Where would it make sense to pay for something outright? Where might it make sense to borrow?

Husband’s MBA the Couple’s Priority

Overall, Taylor offered her recommendations with an eye to having the couple maximize their savings and income while borrowing when they have to and can do so on favorable terms. That’s because for the foreseeable future, Jamey’s schooling will be the hub around which other things revolve.

Jamey has yet to choose a school--he hopes to enter the master’s program in business administration at either UCLA or USC next fall--and it’s too soon to know exactly what his expenses will be. But there are some rough figures the couple can use for planning purposes between now and then.

MBA students at USC pay about $27,000 a year for tuition, books and fees, said Grace Kim, the school’s assistant director of admissions. The cost is expected to rise next year. However, Lea’s being a USC employee means her spouse would get a 50% break on tuition. Thus for Jamey, the cost to attend either UCLA or USC for two years, counting fees, books and other direct school expenses, would be about the same.

Furthermore, it appears likely that Jamey would qualify for education loans on favorable terms.

Financing Back-to-School

Laura Pace, assistant director of USC’s MBA admissions, said most students qualify for a federally subsidized Stafford loan, which provides a maximum of $8,500 a year for graduate study at no interest while the student is in school. After graduation, the new MBA has 10 years to pay off the loan, which has an interest-rate cap of 8.25%, Pace said.

If Jamey receives this loan, his annual out-of-pocket tab for fees or tuition would be $3,500, plus the estimated $3,200 a year in fees and books.

Even if the Gottliebs have a substantial sum put aside for Jamey’s schooling expenses by next fall, Taylor recommended that they borrow the full available amount of the subsidized loan and invest their savings in the meantime. Then, once Jamey graduates, he should pay off the balance as quickly as possible to minimize what he’ll owe in interest. This way, the couple’s savings can be working for them while Jamey is in school.

Taylor urged Jamey to find a summer job between his first and second years and take paid projects during the school year. Not only would he be bringing in income, she said, but he could also be making business contacts.

The planner had other suggestions to help the couple save money and maximize their disposable income. First, she advised that they refinance their home mortgage to take advantage of historically low interest rates.

The Gottliebs have $278,000 remaining on their 30-year fixed 7.75%-interest mortgage. But if they can refinance with a 30-year-fixed loan at 7% with half a point--which Lea, after a bit of preliminary shopping around, believes they can--they should do it, Taylor said.

A difference of 0.75 of a percentage point--and considering the $5,000 in closing costs the couple would have to pay to achieve it--may not sound like much, but, Taylor said, the Gottliebs intend to stay in their home for at least several years. The $161 they’d save on their monthly mortgage payment will add up as the years pass.

In a similar vein, the planner encouraged Lea to refinance her $6,900 student loan, which has an interest rate of 8.26%.

If she acts quickly, she may be able to cut the annualized interest to 7.46% for the next several months, owing to a special break, available through the Department of Education, for eligible debtors who submit applications by Jan. 31, 1999. (For more information on student loan refinancing or consolidation, call [800] 557-7392 or visit https://www.ed.gov/Direct Loan on the World Wide Web.)

Next, there is the matter of an emergency fund. The couple have the money put aside, but Taylor encouraged them to designate $10,000 now in their savings and checking accounts as such. That cash should be kept in a money market fund, where it will earn a better return than bank-account interest.

Because Lea’s need to get another car is getting urgent--her current vehicle, a 1980 Mercedes-Benz, needs very costly repairs--and the couple do not yet know what Jamey’s schooling will cost, Taylor suggested considering a home-equity line of credit to finance a used Camry or Accord, the models Lea is considering. In any case, the planner advised that Lea spend no more than $12,000 for her next car. Lea said she believes she could sell the Mercedes, even as is, for about $6,000.

Flexibility Key for Long-Term Plan

For the Gottliebs, flexibility will be an important concern over the next few years--and one reason they may decide not to tap their emergency fund for a car.

Typically, an equity line will allow you a 10-year period to draw against it and 20 years to pay off what you’ve borrowed. Interest rates are variable, typically running 2 percentage points above the prime rate. And the interest paid on loans of $100,000 or less may be tax-deductible.

None of this is to say that a home equity line of credit will necessarily be the cheapest way for Lea to borrow to buy a car, just that it will allow her flexibility should she need it. Here’s why: Should the need arise, she can choose to make lower minimum monthly payments on the longer-term home-equity debt than what she’d be required to pay on a typical four-year used-car loan. But here’s the catch: If she ends up taking much longer than four years to repay her home-equity line of credit, she will, even after realizing tax savings, end up paying several hundred dollars more for the car.

Whatever they decide, the Gottliebs certainly will be reining in their spending when Jamey reenters school. They’re anticipating forgoing foreign travel, such as their recent trip to Italy, in favor of places they can get to by car, selling some of their UCLA football and basketball season tickets and doing their own yard work.

Their memberships in the Jonathan Club claim $250 a month. But the Gottliebs would prefer to keep those if possible. “I’m very involved in the club,” Jamey said. “I’d rather cut back on other things.”

As for the couple’s other savings, the planner recommended some changes, keeping in mind that they are young and willing to take some risks. Taylor’s main objective was better diversification and simplifying their holdings where appropriate.

Jamey has about $10,700 in his 401(k), to which he contributes about 5% of his pretax income and receives a small contribution from his employer.

About $4,500 of it is in an aggressive growth mutual fund with many smaller-capitalization issues, and $6,200 is in a large-cap blend fund. Both have done fairly well. Jamey also has several hundred shares of Activision stock, acquired through the company’s stock-option program.

Lea has retirement savings in two 403(b) accounts--$6,600 with USC and $2,300 with a former employer. The USC plan requires a minimum 5% contribution for people in her job category, with the university contributing twice as much--10% of her salary. Lea has the option to accumulate more tax-deferred savings in the plan on her own.

Lea’s retirement savings at USC are split equally between two large-cap Fidelity funds, one a value portfolio and the other investing for both value and growth. The account with the previous employer--which must be left there--is spread among stock, balanced and fixed-income investments.

To take advantage of every available tax break, Taylor recommended that both increase contributions to their workplace tax-deferred plans and both open Roth IRAs and contribute the maximum $2,000 a year, even while Jamey is in school.

Roth IRAs have several advantages over traditional individual retirement accounts, but the most obvious is that they allow tax-free distributions in retirement. Once Jamey leaves his job, he plans to roll his 401(k) over into an IRA to take advantage of the broader universe of mutual funds beyond those offered through Activision’s plan.

The planner also recommended that the couple start an investment account outside their retirement savings, aimed at meeting such goals as home renovation or college for their future children.

As for the choices the couple have made so far in their retirement accounts, the planner acknowledged that these were at least adequate and some were very good, but she said the couple’s overall portfolio needs better diversity. She advised that the pair beef up their holdings in mid-cap stocks and bonds as well as international stocks.

Taylor also advanced an argument for investing in a number of concentrated funds--that is, mutual funds that limit their holdings to a relatively small number of stocks or sectors--saying these funds’ managers are allowed great leeway in their buying and selling decisions and that with smaller portfolios, these managers would probably have more time to research the stocks in them.

If the Gottliebs continue saving aggressively, she said, and their investments perform as expected, they should find all of their goals well within reach.

*

Diane Seo 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. We cannot respond to all inquiries.

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This Week’s Make-Over

* Investors: The Gottliebs, Lea, 29, and Jamey, 28

* Occupations: Lea, business manager; Jamey, public relations manager

* Combined gross annual income: $118,000

* Financial goals: Short-term, save as much as possible before Jamey begins two-year MBA program next fall and buy a used car; medium-term, make home improvements; long-term, save for retirement and college for future children

Current Portfolio

* Real estate: About $102,000 in equity in Westchester home, with $278,000 remaining on 30-year fixed mortgage at 7.75%

* Retirement accounts: Jamey has $10,700 in his 401(k) plan, invested in an aggressive growth fund and a large-cap blend fund. Lea has $8,900 in two 403(b) plans: $6,600 with USC, invested in a large-cap value fund and in a large-cap fund that invests for growth and value; and $2,300 with a former employer’s plan, invested in stock, fixed-income and balanced funds.

* Cash: $5,000 in checking account, $9,500 in savings account

* Other investments: Jamey has 810 shares of his employer’s stock

* Debts: Lea owes $6,900 on student loan

Recommendations

* Jamey plans to return to school next fall to earn an MBA. If he is eligible, he should finance as much of his education as he can with federally subsidized Stafford loans, which accrue no interest while the student is in school.

* The couple should refinance their home mortgage and Lea’s student loans if it can be done at significantly lower interest rates.

* To maximize flexibility during a period of uncertain finances, possibly take out a home equity line of credit to pay for a used car for Lea. The couple could also tap their home equity this way should their home need a major repair in the near future.

* Establish a $10,000 emergency fund with cash on hand and keep it in a money market mutual fund. Open an investment account to meet long- and medium-term financial goals. Open Roth IRAs and contribute the maximum $2,000 each year. Investment and Roth IRA money should be divided evenly between stock and bond funds.

* Jamey should raise his 401(k) contributions to the maximum. When he rolls his 401(k) over into an IRA after he leaves his job, he should invest the money in a broader selection of mutual funds.

* Lea should reallocate her 403(b) balances. The account with her employer should be more diversified, and she should raise her contributions to the maximum, if circumstances permit. For simplicity’s sake, the account with her previous employer should have fewer holdings.

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Meet the Planner

Carolyn Person Taylor is a fee-only certified financial planner and the president of Weatherly Asset Management in Del Mar, Calif.