Taking It Slowly

SPECIAL TO THE TIMES

Paula and Ronald Rembert have one child, two jobs and an ambitious goal: to have two children and no jobs.

That is, Paula, 33, and Ronald, 41, dream of having a second child (son Patrick is 9) and retiring in 13 years, when Ronald hits the 23-year mark in his job as a mechanic with the Metropolitan Transit Authority and becomes eligible for a pension.

The couple were aware that making their dreams come true would require some serious saving and investing, but they, like a lot of two-career parents, had plenty of other things to deal with every day, and thinking about far-off goals never became a priority.

As of about a year ago, the couple had managed to put aside just $19,800--$10,000 in Ron's workplace retirement savings, $7,300 in savings accounts and a CD and $2,500 in a mutual fund. Worse, they owed $4,900 on four credit cards.

Ronald, a mechanic with the MTA, and Paula, a health-care associate now working for the Ernst & Young accounting firm, realized they had better start saving more of their income, now about $95,000 a year gross.

Ronald began diverting $200 a month into a deferred compensation plan at work, adding to the retirement plan he was already participating in and to the $100 a month he was depositing in a savings account. Paula, who is not yet eligible for her firm's 401(k) plan, set up an automatic savings plan for $200 a month to go directly into her Charles Schwab account. Altogether, the couple were now salting away more than $7,200 a year.

It was a step in the right direction, but not quite the big bucks required to make their lofty ambitions a reality.

Then came the windfall. Paula inherited $385,000 in real estate and other investments after her mother died about a year ago. The Remberts now owned a $250,000 home in Long Beach free and clear--no mortgage--and were bequeathed $135,000 in a number of money market accounts, CDs, an IRA and a Treasury bill.

As Paula examined her mother's array of ultraconservative investments, she realized that she herself was investing like a senior citizen.

"Looking at my mother's portfolio, I saw how slowly our money would grow if we didn't change our approach and take more risks," Paula said. "I want to take the money and invest it for a higher return in stock mutual funds."

Ronald, for his part, had been equally risk-averse. "I'm even more conservative than she is," he said. "I like to let money sit for a while, sit back and see what happens."

But there's a wrinkle. Before the couple decided it was time to get more aggressive with their investing, Paula withdrew $20,000 from her mother's $80,000 IRA and bought a CD that she used as collateral for a loan to buy a $20,000 car. Then she parked the $60,000 remaining in the IRA in a 30-month 6% CD that won't mature until the year 2000.

The couple have limited their options by having so much of their assets tied up in long-term CDs, said Karen Altfest, a fee-only financial planner based in New York City. "There's not much to do until then unless they want to break a couple of CDs--and there are good reasons and not-good reasons for doing that."

About 87,500 reasons, in fact. Besides the new $60,000 and $20,000 CDs, there's a $5,000 CD Paula inherited and a $2,500 one the couple had before the inheritance. All are for terms of from two to three years.

The penalties for breaking a CD aren't necessarily so onerous that it's never a good idea--it depends on the investor's circumstances. For a couple with the same income but less averse to risk, Altfest would probably advise breaking the CDs and trying to get better returns elsewhere.

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But the Remberts are novice investors who would be more comfortable with making changes slowly, in any case, and who would abhor the idea of paying a penalty for anything.

With a high-priced stock market that could turn bearish soon, "it may be just as well to change your allocations slowly," the planner said.

Paula wondered whether she and her husband might take out a mortgage on their house to free up some cash for investing.

"It's an interesting idea," Altfest said. "But to have money in real estate is to diversify, and writing a monthly mortgage check will just make it harder for you to save for your retirement and the kids' education."

Altfest suggested instead that the Remberts consider their home's equity a source of ready cash if they need it later for college costs or to handle an emergency.

That leaves the Remberts' two $20,000 money market funds and $2,500 in the Schwab MarketTrack Growth mutual fund to work with.

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Altfest advised leaving just $500 in a money market account and selling the large-cap stock-and-bond Schwab fund, which has been a laggard performer.

Altfest selected a diversified mix of no-load funds run by managers she admires; the Remberts can purchase the funds through Schwab to cut down on paperwork. The idea, she said, is for the couple to have their money in U.S. and international funds and to be exposed to the stocks of small, medium-sized and large companies.

Of the $42,000 the Remberts have to invest immediately, $8,000 should go into Baron Small Cap, a new fund that invests in smaller companies and that has earned a 22.9% annualized return since its inception less than a year ago.

"I don't consider the fact that this fund is new to mean it's risky," Altfest said, "because I like the way Ron Baron [has] managed his previous funds."

Another $8,000 should go into Vanguard/Windsor II, a large-cap growth-and-income fund with a five-year annualized return of 22.9% that she likes because it's not quite as conservative as some other funds of its type.

The next $9,000 should go into Tweedy Browne American Value, a nearly 5-year-old medium-cap fund whose lifetime average annual return is an impressive 23.4%. Another $9,000 should go into Delafield, a 3-year-old fund with a lifetime average annual return of 23.4%. This fund is run by two experienced managers, and it invests in stocks that are believed to have potential but that have fallen out of favor with the public.

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The last $8,000 should go into Tweedy Browne Global Value, an international fund with a five-year average annual return of 18.5%.

When the Treasury bill matures in July, the Remberts will have an additional $10,000 to put into these funds, in the same proportion as the initial outlay.

Altfest commended the Remberts on their savings habits.

"You're serious savers, and you pay yourselves first, which is the most effective way to stay consistent."

But Altfest thought the Remberts could be saving more--that they should, in fact, if they're serious about retiring in 13 years and helping one or perhaps two children through college.

When Paula qualifies for participation in her company's 401(k) retirement savings plan in October, Altfest said, she should contribute the maximum, designating 70% for more-aggressive stock funds and the rest for bond funds or lower-risk stock funds.

Ronald has been contributing 5% of his pretax pay to his workplace retirement savings plan, but he's admittedly been less than diligent about researching his investment choices. Altfest urged him to study his employers' offerings, make sure he is contributing the maximum to any tax-advantaged plans and see if he could direct a large percentage of these savings to more-aggressive equity funds.

Eventually, Altfest said, the couple should aim for an overall asset allocation of 1% in a money market fund; 5% in funds that invest in real estate investment trusts; 39% in a variety of short-term, intermediate-term, government, international and general bonds; and 55% in a mix of stock funds.

While the Remberts have quite a bit of time to consider what they'll do with the money in CDs before those mature, Altfest said, they can invest in a financial education. She recommended that they get financial writer Beth Kobliner's book "Get a Financial Life: Personal Finance in Your Twenties and Thirties" (Fireside, $12, 1996).

"It's for your age group and you don't need an MBA to read it," Altfest said. Altfest also suggested that Paula, since she's the more investment-minded of the couple, consider joining the American Assn. of Individual Investors ([800] 428-2244, or http://www.aaii.com). It costs $49 a year to join and has local groups throughout Southern California with monthly meetings.

"The group has no agenda other than to educate investors, and it's an easy way to talk to people who are in your position or are a bit ahead," Altfest said.

The Remberts' decision to continue to carry $4,900 in credit card debt when they have roughly the same amount sitting in savings accounts is costing them, Altfest pointed out. How so? The bank pays just 3% a year on the savings while the Remberts are paying an average of 16% on the credit card charges.

"While this isn't a huge amount of debt, each of the goods or services you charged is now costing you more than you thought when you made the purchase," Altfest said.

She recommended paying off the credit cards as quickly as possible. "Try not to use credit cards as a revolving loan--pay them off in full each month," Altfest added.

That suggestion was the only one the couple balked at.

"I know it's ridiculous thinking," Paula responded, "but I don't want to take that money out of savings. And I know we're losing 13% a year on the interest charges versus what we're getting back on our savings.

"But it does make sense to pay them off, and I'll try to remember that our house can be a source of emergency money," she said.

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Neither Paula nor Ronald has a will, although Paula bought some will software after her mother died.

Altfest nixed the idea of using the software exclusively, cautioning that even one mistake can make a will invalid. Better to use the software to help draw up a list of the couple's bequest and guardianship decisions, thus cutting down on the time they'd need to spend in an attorney's office.

In explaining the necessity for both parents to have a will, Altfest warned that without one, the state would be making the decisions, and it won't necessarily take care of loved ones or name a guardian they would choose for their offspring.

What about having a second child? It may be that the couple can afford to retire early or have a second child, but not both.

If they were to do both, having the baby within the next year, Altfest said, "You'll be retiring when your first child is just finishing college and your second is about 12 years old."

"But the good news is that you're young, and you're going in the right direction. You can revisit all these issues over the next several years," she said.

And maybe there will be a way to have it all someday. Ronald had envisioned relaxing and traveling in retirement, but he has an idea for boosting the family's income after he leaves the MTA--one he hadn't even shared with his wife. He'd like to turn his two-hour-a-day computer habit into a business, selling sports memorabilia through the Internet.

Stephanie Losee is a New York-based writer whose work has appeared in Fortune and other national magazines. She can be reached on the Internet at slosee@aol.com. To be considered for 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.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Situation

* Investors: The Remberts, Paula, 33, and Ronald, 41

* Combined gross annual income: About $95,000

* Financial goals: Save for early retirement and for college for one or perhaps two children.

* The problem: Most of savings are in low-return vehicles, including about $87,500 in long-term CDs.

* The plan: Begin pursuing a more aggressive investment strategy.

This Week's Make-Over

*Investors: The Remberts, Paula, 33, and Ronald, 41

*Occupations: Paula, health-care associate; Ronald, train mechanic

*Gross annual income: About $95,000

*Financial goals: Save for college for Patrick, 9; perhaps have a second child; retire early.

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Current Portfolio

*Real estate: $250,000 equity in Long Beach house owned free and clear

*Cash: $27,500 in certificates of deposit; $40,000 in money market accounts; $4,800 in savings accounts

*Bonds: $10,000 in Treasury bill

*Retirement accounts: For Ronald, $11,600 in workplace savings; for Paula, $60,000 in CD in inherited individual retirement account

*Mutual funds: $2,500 in Schwab MarketTrack Growth

*Debts: $4,900 on four credit cards; $20,000 CD-secured loan

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Recommendations

*The Remberts need to save more, and they should educate themselves about personal finance.

*To begin investing more aggressively, they should sell the Schwab fund and take $39,500 of the money in money market accounts and invest it in a diversified mix of five stock mutual funds. When the Treasury bill matures, that money should be split among the same five mutual funds.

*As the CDs mature, the couple should invest the money in mutual funds.

*They should pay off credit card debt as soon as possible.

*They need to draw up wills.

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Recommended Mutual Funds

*Baron Small Cap: (800) 992-2766

*Delafield: (800) 221-3079

*Tweedy Browne American Value: (800) 432-4789

*Tweedy Browne Global Value

*Vanguard/Windsor II: (800) 992-8845

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