Couple Need to Assume a More Aggressive Retiring Demeanor
Michael Haschka and Michelle Villanueva can envision their future in detail; they just need a little help planning for it.
The couple, 39 and 28, respectively, and married two years, wax enthusiastic about the day 20 years from now when they can work part time and indulge their love of travel and of sports such as scuba diving and rock climbing. Ask what they’ve done to make that a reality, though, and it becomes clear they’ve been putting off the hard part.
For a couple who made about $85,000 last year, their assets are fairly modest--the $10,000 equity in their two-bedroom Calabasas condominium and the $18,000 in Villanueva’s 401(k) plan. They’re saving some, but they aren’t meticulous about budgeting and they have no overall financial strategy.
“We need to be aggressive,” Villanueva said, acknowledging that 2018 isn’t so far away. “If we can develop a financial plan, we can make it all happen,” she said confidently.
“We are a canvas that is ready to be painted on,” said Haschka, expressing his eagerness for professional financial help. “I’m almost 40, and I have no retirement plan. That’s frightening.”
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Frightening is right, agreed Eric Bruck, a fee-only certified financial planner in Culver City. The couple “have a lot of knowledge--including the knowledge that they need to do something more--but they don’t know how to act on it,” Bruck said.
They can start by making a commitment: Establishing a firm financial foundation will be their No. 1 priority. If they can do that, the couple may indeed be able to reach their goals.
It should come as no surprise that Haschka’s distaste for the nuts and bolts of financial management tasks would be evident in his business as well.
Haschka set himself up as a computer consultant three and a half years ago, establishing a sole proprietorship and working out of the couple’s home.
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Last year, the business grossed more than $188,000, Haschka said, but after expenses, his income from the business was barely 25% of that. So far this year, he says, his gross is running 20% ahead of 1997, but, as the planner pointed out, Haschka can’t say much more about how much of that he expects to have in personal income this year. That’s because, as much as Haschka relishes the challenge of designing computer systems and trouble-shooting technological woes, he has been procrastinating attending to such business basics as writing a business plan.
As it stands now, Haschka is beginning to consider whether he wants to take his business beyond a one-man operation.
Until Haschka decides where he wants to go with his business and has a system for projecting how much income he can expect from it, he and Villanueva, who works for Liberty Insurance Group as a specialist in preventing workplace injuries, can’t make realistic savings plans or follow any kind of comprehensive financial strategy.
There are some problems they can address immediately, however.
First, the couple need a better understanding of what they are spending day to day and month to month.
That, too, is complicated by the fact that the business and personal finances are not entirely separate. Haschka and Villanueva use some money kept in the business account for personal expenses--and they are also a bit ad hoc in their joint financial arrangements, keepingboth joint and separate personal checking accounts. So although the couple know what their larger expenses are--$1,500 a month for the mortgage and homeowner association fees, $499 a month for the leased 1994 Mercedes and $399 for the leased Jeep Grand Cherokee--they aren’t keeping a diligent record of smaller daily expenses.
“You need a household budget,” Bruck told them. “It will ultimately show you how much you can save and invest each month.”
This is especially important in light of the fact that Villanueva has recently begun graduate study, pursuing an MBA at Pepperdine University. The couple are still attempting to determine how they will pay the Pepperdine bill, estimated at $32,000 for the two-year program. They paid for Villanueva’s first semester upfront, and now they are waiting to hear whether she will receive a low-interest student loan. In addition, Villanueva hopes her employer will agree to pay a portion of the tuition.
Next, there is the matter of an emergency fund. The couple think of the $10,000 to $20,000 always available in the business checking account as something they could tap if needed for a personal (as well as a business) emergency.
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Bruck urged Haschka and Villanueva to keep personal money truly personal (that will help Haschka with his business planning too), and to place at least $10,000 from the business account in a money market account, where it will earn some interest as it remains readily accessible should they need it. The planner based this number on the couple’s estimate of their minimum monthly expenses and the fact that they are a two-career couple--meaning that if something should happen to one, the other would still be earning money.
The financial planner urged that Haschka buy long-term disability insurance, specifically a policy that would cover him to age 65 and that would allow him to increase his coverage without continually requiring fresh evidence of his continued health. Villanueva could end up in a really tough spot should Haschka face a protracted health problem, be unable to work and perhaps need expensive medical care as well. (Villanueva is covered through her job.)
Bruck said Haschka lacks adequate life insurance coverage too. Bruck urged Haschka to obtain term life insurance, recommending a level-premium policy that would run 20 years--the length of time before Haschka plans to retire. “Level premium” means Haschka will pay the same every year for his coverage.
Bruck was happy to hear that Villanueva contributes 10% of her pretax income to her company’s 401(k) plan, for a total of $828 a month including the employer’s match, but he is concerned that that appears to be the extent of the couple’s retirement savings.
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To get a start on remedying that, Bruck strategized with the couple, helping them to come up with a preliminary retirement investment plan that would give them enough money for an annual income of $90,000 in today’s dollars in 2018. Bruck noted that such a plan is necessarily temporary, not only because Haschka is not yet sure where he wants to go with his business but also because the couple’s income can be expected to rise during the next few years, and because they might decide later to have children or buy a bigger home.
In any event, however, Bruck would like to see the couple save more than $3,000 a month overall, in retirement and other accounts. That’s a goal all agree is impossible at the moment, but one the couple should strive for in the future.
“You may not be able to reach these objectives every month or even this year,” the planner acknowledged, but “this is just a road map.”
Haschka needs to set up a formal retirement pension plan for himself as soon as possible, Bruck said, either a simplified employee pension individual retirement account (commonly known as a SEP-IRA) or a Keogh plan. Either of these plans for self-employed people would allow Haschka to put away a portion of his pretax income for retirement use, and the returns on investments in either plan accumulate tax-deferred until retirement. As a broad rule of thumb, the paperwork involved with a SEP-IRA is simpler, but Keoghs offer greater savings potential.
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Bruck suggested a Keogh for Haschka, assuming that Haschka’s business will grow quite a bit in the next few years and that Haschka would want to be putting aside as much of his income as possible tax-deferred. Bruck said an automatic-deposit arrangement would be an easy way for Haschka to force himself to save.
Bruck estimated that Haschka could be saving at least $15,000 annually through this account within the next few years, and ultimately as much as 25% of his self-employment income or $30,000 per year--the maximum allowable annual contribution for a Keogh.
In addition, Haschka and Villanueva should attempt to save at least $1,000 a month outside of retirement accounts.
“This adds some liquidity to an otherwise illiquid and otherwise inaccessible asset base,” Bruck said. In other words, the planner said, they’ll want to have a chunk of savings readily available should they decide to, say, buy a new home.
As for Villanueva’s 401(k) choices, Bruck suggested that, given her long time horizon and her appetite for risk, she switch from a moderately aggressive mix of stock and bond funds to a more aggressive menu of stock funds, spreading her contributions among seven funds that together cover the large-cap, small-cap and international categories.
For the Keogh and savings outside the 401(K), Bruck suggested a diversified selection of mutual funds. Of this new savings, 40% should be divided among three large- and mid-cap domestic growth mutual funds: American Century Equity Growth (five-year average annual return: 24%); Schwab 1,000 (five-year average annual return: 21.4%), which tracks the Schwab 1,000 index of the largest publicly traded U.S. companies, and Rainier Core Equity Portfolio (fund is less than 5 years old). Bruck is familiar with Rainier from the institutional side of his firm’s practice and has confidence in its money managers, he said.
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Twelve percent should be reserved for small U.S. stocks, in either Neuberger & Berman Genesis (five-year average annual return: 19.3%) or Oakmark Small Cap (fund is less than 5 years old), which Bruck chose on the basis of their risk-return histories. Twenty percent of the savings should be designated for international investments, with 14% going into Janus Worldwide (five-year average annual return: 23.6%) and 6% into GAM Global (five-year average annual return: 24.4%). Bruck believes the couple should keep 7% of their holdings in a mutual fund that invests in real estate investment trusts, such as Cohen & Steers Realty Shares (five-year average annual return: 14.8%).
As fixed-income diversifiers for their portfolio, Bruck recommended that 17.5% of their new savings be allotted three bond funds: Northeast Investors Trust (five-year average annual return: 14.1%), a high-yield corporate bond fund that Bruck described as “a very, very steady performer”; FPA New Income (4.5% load; five-year average annual return: 7.6%), which invests in intermediate- and long-term securities, with the emphasis on those of government and government-related agencies; and Strong Advantage (five-year average annual return: 6.2%), a short-term corporate bond fund.
The couple pronounced themselves happy with the advice but said it is a lot to chew on.
“It filled a lot of gaps. Eric told us a lot of things we knew but didn’t talk about,” Villanueva said.
Added Haschka: “Now I need to find the time to do it all. That’s the hard part.”
Helaine Olen is a frequent contributor to The Times. She can be reached on the Internet at holen@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.
Michael Haschka’s enterprise is discussed in Wednesday’s Business Make-Over, in the Small Business pages.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Situation
Investors: Michael Haschka and Michelle Villanueva
Financial goal: Save for retirement
The problem: No long-term plan
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Meet the Planner
Eric Bruck is a fee-only certified financial planner and principal of Burck & Caine Advisory Inc. in Culver City. He specializes in providing retirement planning, cash flow analysis and portfolio supervisory services for individuals.
This Week’s Make-Over
Investors: Michael Haschka, 39, and Michelle Villanueva, 28
Occupations: Haschka, a self-employed computer consultant; Villanueva, insurance company risk-prevention specialist
Annual income: $85,000 last year
Financial goal: Save for retirement
Current Portfolio
Real estate: About $10,000 equity in Calabasas condominium
Retirement accounts: $18,000 in Villanueva’s 401(k), invested in stock and bond funds
Cash: $10,000 to $20,000 is kept in Haschka’s business bank account if needed for either personal or business emergencies
Recommendations
* Create a business plan for Haschka’s enterprise. Doing so will allow the couple to make more-informed decisions about their personal finances.
* Designate $10,000 as personal emergency savings and place it in a money market account
* Haschka should set up a Keogh or SEP-IRA tax-advantaged retirement savings account
* Aim to increase savings to at least $3,000 a month overall, in a diversified portfolio of mutual funds.
* Buy disability and term life insurance for Haschka.
Recommended Mutual Fund Purchases
American Century Equity Growth: (800) 345-2021
Cohen & Steers Realty Shares: (800) 437-9912
FPA New Income: (800) 982-4372
GAM Global: (800) 426-4685
Janus Worldwide: (800) 525-8983
Neuberger & Berman Genesis: (800) 877-9700
Northeast Investors Trust: (800) 225-6704
Oakmark Small-Cap: (800) 625-6275
Rainer Core Equity Portfolio: (800) 248-6314
Schwab 1,000: (800) 435-4000
Strong Advantage: (800) 368-1030
