Safest Strategy Is Not Always Smartest
P.J. Pascale and Sheilah Jones are hardly what you’d call materialistic. The couple, both teachers, are more interested in the life of the mind. In nearly 10 years of marriage, they didn’t give much thought to financial security--until their son, now 2, was born.
“I didn’t appreciate money when I was younger,” said Pascale, 37, a mathematics teacher and assistant football coach at Loyola High School in Los Angeles. “Now I care only because I have a family.”
Yet they want the best for their son Austen-Jones Pascale--a home with a large backyard, a private elementary school and college education. They’d also like to see their son, whom they’ve nicknamed A.J., with a little sister or brother one of these days.
But it’s clear that education is the focus of Jones’ and Pascale’s parental philosophy, as well as the thing they themselves are most interested in.
“I want A.J. to have a really good education,” Jones, 40, explained. “I want him to be able to do whatever he wants to do. His education is more important to me than my retirement, because I can work till I drop if I have to.”
Jones, like her husband, is also a teacher, currently serving as a part-time adjunct instructor of religious studies at Mount St. Mary’s College in Los Angeles. In addition, she’s a candidate for a doctoral degree in a related subject at USC. Dissertation topic: the teaching of morality in Catholic secondary schools.
As rewarding as both find their careers in education, however, they know it’s not the most lucrative of professions. Between Pascale’s income (including summer teaching gigs) and Jones’ earnings, the couple gross just under $60,000 annually.
Although they’ve given some thought to their goals and setting priorities, they need to take this further, said Preston Caves, a fee-only certified financial planner based in Manhattan Beach. “It’s all trade-offs. The idea is to balance all of your objectives.”
In the last few years, it’s clear that parenthood has come first on the couple’s list. For example, Jones recently gave up teaching at USC for the less lucrative position with Mount St. Mary’s because class time changes wreaked havoc with A.J.’s day-care arrangements (the couple pay a family friend $10 an hour for child care). Jones says she won’t return to full-time paid work until her son is attending elementary school.
“My priority is to be with A.J. as much as possible,” Jones explained. The couple have made numerous other decisions over the years that have affected their present-day bottom line, something they are only beginning to realize.
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Pascale is aware that he could earn a significantly better salary--as well as be assured of a pretty good lifetime pension--if he taught in a public school. But, as a graduate of parochial schools himself, he said, he knows the value of a Catholic education.
“I don’t intend to leave Loyola ever,” he declared. “I don’t want to teach in the public schools. I would rather take less money.”
Since they became parents and Jones began pursuing post-graduate study, the couple haven’t been able to save much. Even now, when their circumstances are a little better than before, there’s not much fat to cut: Their few indulgences include a $20-a-month book club membership for A.J. and Jones’ $42-a-month gym membership (which includes child care). Jones doesn’t think of the latter as an indulgence, though. She says she joined the gym after a number of scary encounters with neighborhood stray dogs during walks outside with A.J. The couple haven’t taken any far-off extended vacations in eight years, and they drive automobiles of late-’80s vintage.
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Their portfolio includes the $19,720 in Jones’ individual retirement account and the $10,350 in Pascale’s, both of which are invested in fixed-income annuities; $14,100 in cash-value life insurance policies and a total of $12,000 in two cash-equivalent funds.
In addition, the couple have some real estate holdings, both inherited from Jones’ late mother: a share of a house in Inglewood, now being sold, and a share of a $12,000 plot of vacant land in Louisiana.
Jones expects to clear at least $35,000 from the Inglewood property this summer. But the sale will change the couple’s circumstances: They have been living in the house at very low cost for the last several years, paying the $200-a-month mortgage until late last year, when the loan was paid off.
When they started looking for a new place to live, they thought of buying a home in or near Los Angeles’ Westchester neighborhood. But with most prices there surpassing the $300,000 mark, they realized that would be out of the question.
So they regrouped, considered their options and started investigating home-buyer programs. They began house hunting in less expensive neighborhoods and are now in escrow for a $135,000 for a home in Southwest Los Angeles. The Los Angeles County program they are participating in allows them to put down 5% of the purchase price. The program further allows the couple a significant credit on their federal income taxes, in effect cutting the cost of homeownership for them by about $160 a month. Caves estimates that their monthly nut, which includes mortgage payment, taxes and homeowners and other insurance, is likely to run about $1,000.
It’s not a bad deal, but the couple could find themselves in a bit of a bind a few years from now when they want to send A.J. to parochial school. Those bills can be expected to run about $4,200 a year in today’s dollars, they said. And, of course, Caves observed, if the couple have a second child, their finances would be stretched further.
The planner supported the idea of their buying a home, however, pointing out that renting a two-bedroom apartment would cost the couple about $1,000 a month and they’d have no chance to build up equity. He assured Jones and Pascale that they were doing the right thing in purchasing a residence without tapping the equity in the property from Jones’ mother for a traditional 20% down payment. Caves’ rationale: They might need to use a big chunk of that inheritance to supplement their income until Jones returns to full-time paid work.
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“I’m very concerned in your cash flow and your step up to a mortgage,” Caves told the couple. “With that inheritance, you’re just going to make it. That money is likely to go within the next five years to support your family’s lifestyle.”
After making their down payment and paying closing costs and moving expenses, the planner estimated the couple would have about $39,000 from the sale of the house and a money market fund. He recommended leaving $12,000 in a money market account, where it would be readily accessible for emergencies, and putting the remainder in Pimco Low Duration Institutional (five-year average annual return: 6.7%), a short-term bond mutual fund that invests mainly in mortgage-backed securities and corporate bonds and that will provide the couple with extra income. Although it is an institutional fund, individual investors can buy it through Charles Schwab’s OneSource mutual fund “supermarket.”
As for the rest of the couple’s portfolio, Caves urged an overhaul.
He argued that their only real investment choices--the three cash-value life insurance policies and the two annuities in IRAs--offer neither good returns nor diversity and that having annuities in an IRA is a belt-and-suspenders approach to tax savings. That money could be put to better use, he said.
The couple said they made those selections several years ago, when they knew almost nothing about investing and were inclined toward only the most cautious choices. They were attracted to the forced savings implicit in cash-value life insurance, and neither had much familiarity with the stock market. Jones, in fact, was so risk-averse, she said, that she literally got sick to her stomach watching Pascale play craps once in Lake Tahoe.
Caves pointed out, though, that they’d come out ahead if they replaced their current insurance policies with level-premium term life coverage that has death benefits of $200,000 for each of them and then used what would be at least $1,000 a year in premium savings to supplement their income.
“You’re going to need that money,” he explained. But, he added, they should make sure they are indeed able to obtain term life insurance, which requires health examinations, before cashing out of their current policies.
When it comes to investment risk, however, Pascale said he remains convinced that there isn’t much difference between Wall Street and legalized gambling. But Jones has made a point of reading up on investing lately and has decided to give stocks a try. So the planner recommended that the couple consider a portfolio that would be evenly divided between stocks and bonds. “That’s not a wild and crazy investment scheme,” he assured them. “That’s a moderate-risk investment program.”
To get started, Jones and Pascale should consider surrendering two of their individual cash-value life insurance policies soon, Caves said, and invest $9,800 in proceeds in T. Rowe Price Spectrum Growth Fund (five-year average annual return: 17.8%). As they become more comfortable with stock market risk, they might want to give up Pascale’s remaining life insurance policy, which has an estimated cash value of $4,300, and invest the proceeds of that in a stock fund as well.
Pascale expressed some concern about the money already spent on premiums for the insurance. “You need to be forward-thinking,” Caves told him by way of explaining what is a common pitfall for investors. “You already spent the money on the policy, and you can’t change that fact. In the banking industry, they would call” continuing to put money in it only because you already have “throwing good money after bad money.”
Caves then urged a restructuring of Jones’ IRA. Since she would lose only $355 in surrender charges by cashing out of her annuity, the planner advised her to do that as soon as possible and then invest the proceeds in an array of mutual funds designed to add the maximum diversity to her portfolio.
Jones should place $5,000 in T. Rowe Price Spectrum Income (five-year average annual return: 9.1 %) and $4,365 in T. Rowe Price Spectrum Growth, Caves said. Both are what is known as funds of funds--that is, they are mutual funds that invest in other mutual funds--in this case, T. Rowe Price international and domestic stock funds and bond funds. A $2,000 portion should be designated for Managers Special Equity (five-year average annual return: 18%), a highly regarded small-cap fund.
Caves also recommended several international mutual funds for Jones’ IRA. He suggested that she put $5,000 into SoGen International Fund (five-year average annual rate of return: 11.7%), $2,000 in Acorn International (five-year average annual return: 13.2%) and $1,000 in either Templeton Developing Markets Trust (five-year average annual return: 3.6%) or Montgomery Emerging Markets (five-year average annual return: 0.7%).
Pascale can’t give up his individual retirement account annuity without paying a high surrender fee, and since he’s the less adventurous investor of the pair, Caves said, he should leave that alone for now.
The planner concurred with the couple’s assessment that, unfortunately, it’s unlikely they’ll be able to afford to make any contributions for the next several years to the 403(b) retirement savings plan Pascale’s school offers. An opportunity for tax-deferred savings is not something to be forgone lightly.
Caves urged that the couple reassess their financial condition and priorities regularly.
“Are you really doing your son a favor by putting all your money into education and none into retirement, making it possible that he will have to support you one day?” Caves asked them.
On this point Jones and Pascale are torn. Both believe they benefited enormously from their own parochial educations and want to be sure their offspring get the same opportunity, but they are willing to concede that the planner may have a point. In fact, since talking to Caves, Jones has already begun to investigate the Los Angeles Unified School District’s magnet school program.
“I’ve really begun to think about a lot of different options,” Jones said.
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Meet the Planner
Preston S. Caves is a fee-only certified financial planner and chartered financial analyst. His firm, Caves & Associates in Manhattan Beach, specializes in investment management consulting for retirement plans and large private portfolios. Caves also helps people with special financial planning needs, such as business owners and individuals with high net worth. He has an undergraduate degree and a master’s of business administration from Stanford University.
This Week’s Make-Over
* Investors: Sheilah Jones, 40, and P.J. Pascale, 37
* Occupations: Jones, college instructor; Pascale, high school teacher
* Combined gross annual income: About $60,000
* Financial goals: Save for son, now 2, to attend Catholic elementary school and college; and put away money for their retirement.
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Current Portfolio
* Cash: $10,000 in a money market account, $2,000 in a savings account earmarked for son A.J. and $400 in savings bonds.
* Insurance: A combined total of $14,100 in three whole-life insurance policies.
* Retirement accounts: Jones has an annuity worth $19,720 in an individual retirement account with Metropolitan Life; Pascale has an annuity worth $10,350 in an IRA with Principal Financial Group.
* Real estate: In escrow on a $135,000 Los Angeles home purchased with down payment of 5%; about $35,000 in equity in inherited Inglewood home; a share of a vacant plot worth about $12,000 in Louisiana
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Recommendations
* Buying a home will stretch the couple’s means; they need to give more attention to the matter of setting priorities.
* To improve investment returns and save money, separate life insurance coverage and investments. Buy level-premium term life insurance policies with death benefits of $200,000 for each. Cash out of current whole-life policies and invest the money in stock mutual funds.
* Jones should surrender her IRA annuity and invest the money instead in an array of mutual funds. Pascale’s IRA can remain as is for now.
* To supplement their income, the couple should invest some of the proceeds from selling inherited real estate in a low-risk bond fund.
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Recommended Mutual Fund Purchases
Acorn International: (800) 922-6769
Managers Special Equity: (800) 835-3879
Montgomery Emerging Markets: (800) 572-3863
Pimco Low Duration Institutional: (800) 927-4648
T. Rowe Price Spectrum Growth: (800) 638-5660
T. Rowe Price Spectrum Income
SoGen International: (800) 334-2143
Templeton Developing Markets Trust: (800) 292-9293
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.
