Young Couple Setting Stage for House, Family and Future

If all the world’s a stage, then Betsy and Tom Sunstrom would rather be playing more glamorous parts.

The Silver Lake couple shared dreams of making it as actors in Hollywood or on the stage when they met in graduate school five years ago. And they’ve had a measure of success, earning small roles on television and in the theater.

The couple are justifiably proud of what they’ve accomplished so far. Betsy has appeared on “Beverly Hills 90210” and Tom on “Pacific Blue,” “The Bold and the Beautiful” and in the TV movie “The O.J. Simpson Story.”

Betsy, 29, and Tom, 31, have been married 18 months. Both have master’s degrees in fine arts and have been supplementing their acting income with teaching and other jobs. They grossed a respectable $72,000 last year and, although they have $35,000 in student loans between them, they have no other significant debt and have managed to save almost $17,000.

Nonetheless, the Sunstroms ultimately want a more stable financial situation. “We knew going in how sporadic an acting career is,” said Tom. “We could have a lot of work one month and none the next.”

With that in mind, and not wanting to put buying a house or starting a family on hold, they decided that teaching careers would be a good backup.

Besides, added Betsy, “acting wasn’t paying the bills.”

Although TV work pays well, Betsy gets paid “a pittance,” she said, for her appearances in theater productions by the Los Angeles Company of Angels. Tom and Betsy also make $250 a month each as members of the South Coast Repertory’s Young Conservatory in Orange County, teaching acting to youngsters on Saturday mornings.

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Overall, the couple have done an admirable job of managing their finances and juggling their careers, said Michael V. Glowacki, a Los Angeles-based, fee-only certified financial planner who reviewed their finances for The Times.

Glowacki said the Sunstroms are wise to pursue teaching. “They’ve recognized that they are going to need more financial stability than acting may be able to provide,” he said.

“But they are young, and they’ve already established the proper savings and spending attitudes that, with time, will let them achieve their financial goals. All they need is a steady income stream.”

The couple’s main goals are not unusual: “We’d . . . like to be able to afford a down payment on a house in three or four years, save for a child’s future and acquire life insurance,” Tom said.

For their financial plan, the couple and Glowacki agreed to assume that teaching would be the main source of family income.

Even so, the Sunstroms’ teaching careers carry uncertainties. Betsy teaches special education in Burbank on an emergency permit. The limited license was created to help school districts cope with a shortage of fully certified teachers when the state ordered reduced class sizes.

Betsy’s job is classified as “full-time substitute.” She won’t know until August if she’ll be hired back to teach next year. But she plans to start taking classes this summer to become fully certified.

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Tom hopes his present job, teaching acting part time at Chapman University in Orange, will lead to a full-time professorship at the small private school. His current contract is renewable every semester. At this point, he’s assured of a job only for the fall term. He also works part time as a waiter at the House of Blues in West Hollywood.

With none of their jobs entirely secure, Glowacki first recommended that the couple identify as a $10,000 emergency fund the $6,000 they hold in a tax-free money market fund and $4,000 in savings and credit union accounts.

However, for manageability and to improve yields, he suggested reallocating the funds: $5,000 into a taxable money market fund and $5,000 into a short-term bond fund.

The couple have the $6,000 in a Charles Schwab tax-free fund that pays 3% interest. Because they don’t need that tax shelter at their income level, Glowacki advised the couple to move $5,000 to their account’s taxable money market fund, now paying about 5%.

For the Sunstroms, a 3% California tax-free yield would be worth at most a 4.59% taxable yield, and that assumes their taxable income this year will be over $65,833 (and less than $102,300--the range for a combined effective federal-state tax rate of 34.7% on joint filers), according to data provided by Zane Mann at California Municipal Advisor, a newsletter based in Palm Springs.

More likely, deductions will push their taxable income to between $52,100 and $65,800, which would put them in the combined effective state-federal rate of 33.8%, making that tax-free 3% yield worth only 4.53%.

At current yields and tax rates, tax-free municipal bonds make sense only for taxpayers in higher income brackets--above $156,000 for couples, or $128,000 for single filers.

If the Sunstroms need money, they could tap the money market fund first--giving them a little flexibility to improve the yield on the other $5,000. Glowacki suggested this be placed in the Pacific Investment Management Co. (Pimco) Low Duration Fund (five-year average annual return: 6.6%). The fund invests in short-term bonds with an average maturity of about two years that are only slightly more risky than money market investments.

Outside of their retirement accounts, the couple have about $4,000 in the Janus Fund and $1,300 in two stocks, Boston Beer Co., which brews the Samuel Adams brand, and Airstar Technologies, which is installing telephones on Army bases under a contract with Sprint Corp. Both were purchased on the advice of friends.

Boston Beer’s stock has slipped to about $12 a share since Tom acquired 99 shares in the company’s initial stock offering two years ago. He paid $15 a share for the stock in a special offering.

At about the same time, he paid $2 each for 500 shares of Airstar, which turned out to be an investment disaster. That stock now sells for about 16 cents.

Glowacki said the overall lesson is clear: Don’t buy investments on a whim or a friend’s advice. Research them and weigh the risk.

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Glowacki noted that the Janus Fund, which holds large-company domestic stocks and has a five-year average annual return of 19.4%, has underperformed the benchmark S&P; 500 index by 4 percentage points over the same period.

One possibility would be to sell those holdings to reduce the Sunstroms’ student debt, which they consider a monkey on their backs. “That kills me,” said Tom. Payments are due on the loans until 2014.

But Glowacki counseled them to keep making minimum payments on the 9% loans until they have a house and, they hope, more reliable income. They can pay off the loans early if they have excess income later.

“It might be uncomfortable, but aside from a mortgage, it’s probably the cheapest debt you’ll ever have,” he said.

Thanks to the 1997 tax law, the couple may even be able to deduct some interest on their student loans if their taxable income falls below $60,000.

Glowacki suggested that the fund and the stocks be sold and the money reinvested as the core of their savings for a down payment on a home, using a technique that takes advantage of another aspect of the 1997 tax law that would reduce taxes on their savings: Roth IRAs.

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Roth IRAs, like traditional IRAs, are designed for retirement and generally do not permit penalty-free withdrawals before age 59 1/2. But beginning this year, both types offer several exceptions to that rule, including one for first-time home buyers: They can take out up to $10,000 penalty-free.

The Sunstroms probably won’t qualify for traditional IRAs because their income is too high, but they qualify for Roth IRAs, which permit $2,000 nondeductible annual contributions for couples earning less than $150,000.

The planner advised the Sunstroms to contribute to Roth IRAs each year. That money, as well as the rest of the home savings, should be placed in a mix of stock and bond funds. Because they expect to need this money for a down payment within five years, “don’t put more than 30% of it in stocks” in case of a severe downturn, he said.

Glowacki recommended allocating 20% of their home savings to Dimensional Fund Advisors U.S. Large Company, a fund that mirrors the S&P; 500 index (five-year average annual return: 23.47%) and 10% to Lazard International Equity Open Shares (five-year average annual return: 16.1%), a diversified foreign stock fund that primarily invests in European companies.

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He advised putting 55% of their home savings in fixed-income investments in the Pimco Low Duration fund and the remaining 15% in Pimco High Yield Bond (five-year average annual return: 11.8%).

Pimco High Yield invests in low-grade, high-yield junk bonds, which may lose value in an economic downturn but offer at least the prospect of a better return than the far more conservative Low Duration fund. “It’s a pretty safe bet because they buy at least 100 of these securities,” Glowacki said.

While they save for a house, the Sunstroms must also consider long-term retirement planning. But the couple were pleased to learn that teaching offers generous retirement benefits.

Betsy is required to put 8% of her yearly pay into the California State Teachers’ Retirement System, which, with school contributions, funds a generous pension.

“Depending on how long you plan to teach, you can pretty much predict now what your retirement income is going to be,” Glowacki said.

Using today’s dollars--the actual figures are likely to be higher due to inflation--Glowacki figures that if Betsy teaches until age 55 and is then earning $60,000, her monthly retirement check will be about $1,750. But the plan gives her a powerful incentive to keep working past that point.

Teaching until she’s 65 would more than triple Betsy’s retirement check, to $5,600 a month. That would amount to $67,200 a year or, as Glowacki noted, a bit more than her salary at that point.

Tom thought his only workplace retirement plan was a 401(k) at the club where he waits tables several nights a week. He contributes 8% of his weekly pay to it, investing in two stock funds the plan offers: AIM Equity Constellation and AIM Value Fund.

Tom was surprised to hear he is also eligible for a 403(b) tax-deferred annuity at Chapman University even as a part-timer. He could be contributing 20% of his salary, up to $10,000 annually, to a flexible tax-deferred annuity with several investment choices, including stocks, bonds and money market funds.

Glowacki strongly recommended that the couple use these retirement savings vehicles as much as they can.

After they are more settled and are fully funding their retirement plans, they will be able to afford additional savings, Glowacki said.

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For these, he suggested they consider three stock and two bond funds: 20% would go to DFA U.S. Large Company Value (five-year average annual return: 20.1%); 20% to DFA U.S. 9-10 Small Company (five-year average annual return: 20.3%); and 30% to Lazard International Equity Open Shares.

To smooth stock market gyrations, 30% would be split between the two bond funds. He recommended Pimco Foreign (five-year average annual return: 11%) and Pimco High Yield, which work well together for diversification because U.S. and foreign bond markets often move independently.

The DFA funds can be purchased only through fee-only financial advisors and require a $10,000 minimum initial investment. Fee-only financial advisors aren’t paid to recommend such investments, Glowacki said. But they often like to use them because institutional shares of any fund, when they are available, have lower expenses than retail shares. That can boost investors’ return by a quarter to half a percentage point.

The Pimco and Lazard funds are available through brokerages such as Charles Schwab with minimum initial investments of $2,500 each.

The Sunstroms told Glowacki they were eager to implement their new financial plan, and they wasted no time proving it.

Tom was off to Schwab the next day to get started.

“This was exactly what we needed--some professional advice,” he said. “We’d been saving hard but didn’t really know what to do with it.”

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Jill Bettner, a former Times reporter, is a Los Angeles-based freelance writer. She can be reached on the Internet at jbettner@earthlink.net.

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 can be left at (213) 237-7288. We cannot respond to all inquiries.

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This Week’s Make-Over

* Investors: The Sunstroms, Betsy, 29, and Tom, 31

* Occupations: Betsy, actress and full-time substitute teacher; Tom, actor, part-time theater professor, part-time waiter

* Gross annual income: $72,000

* Financial goals: Buy first home within five years, stabilize finances

Current Portfolio

* Cash: About $10,000 in various accounts

* Mutual Funds: $4,000 in Janus Fund

* Stocks: $1,200 in Boston Beer Co., $80 in Airstar Technologies Inc.

* Retirement accounts: For Betsy, $900 in teachers’ pension plan; for Tom, $1,200 in 401 (k), invested in stock funds

* Debts: $35,000 in student loans

Recommendations

* Move money from tax-free money market fund to a higher-yielding, taxable one.

* Open Roth IRAs.

* Sell individual stocks and diversify savings for house and, ultimately, children’s education.

* As soon as they have a child, buy $500,000 of renewable-term life insurance and consider buying disability insurance.

Recommended Mutual Funds

Lazard International Equity-Open Shares (800) 823-6300

Pimco High Yield

Pimco Foreign Bond

Pimco Low Duration (800) 426-0107

DFA U.S. Large Company

DFA U.S. Large Cap Value

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

Meet the Planner

Michael V. Glowacki is a Los Angeles-based, fee-only certified financial planner and certified public accountant. He is president of the Los Angeles Chapter of the International Assn. for Financial Planning. His firm, Glowacki Framson Financial Advisors, specializes in financial planning and tax-sensitive investment consulting for small-business owners and high-net-worth individuals. He holds a master’s degree in business taxation from USC.