Savers on Right Path but American Dream Is Still Far Off

Mark Stephenson and Cherie St. Jean have known the strains of unemployment and debt. At this point in their lives, they’d like to stay on friendly terms with security.

Fortunately, Stephenson, 34, and St. Jean, 29, have discipline on their side, and they have a comfortable combined annual income of $78,000. Neither has extravagant tastes--their idea of fun runs to outdoor activities such as camping and hiking rather than nightclubs and resorts. And their goals are not out of reach. They simply want to pay off Stephenson’s student loan by next summer, save enough to start a family in a few years and buy a nice home in the Ventura area before 2000.

Stephenson, a guard at the federal prison in Lompoc, traces his thriftiness to growing up “dirt poor” and seeing his parents try to scrape by in retirement on Social Security.

“I don’t want to wind up like that,” he said.

For her part, St. Jean, 29, a paralegal at Amgen, the biotech giant in Thousand Oaks, credits some choice dollar-stretching lessons from Dad (which helped her pay off her student loans in a few years).

Those money-saving skills really got a workout from 1994 through early ‘97, when Stephenson, a Marine veteran now in the Reserves, had a hard time finding a job after graduating from Cal State Northridge with a degree in physical education.

During that time, the couple lived on St. Jean’s then-$30,000 salary plus the small sum Stephenson got as a member of the Reserves. The couple not only got by, they managed to save $6,000 for Stephenson to attend a four-month police academy training program, make payments on St. Jean’s student loans (Stephenson had a deferment on his) and even for St. Jean to contribute to her 401(k) plan.

“It was tough,” she said. “There were times we couldn’t even go out and rent a movie because we knew we needed to save the money.”

Diversifying the Investment Plan

Though those days are long over, the couple have stayed focused on their goals and faithful to the live-on-one-income habit. St. Jean has since landed a better-paying job--her position at Amgen pays $48,000 a year--and Mark is now earning $30,000. However, the couple still rent an $875-a-month one-bedroom apartment in Ventura and drive older cars, both paid for. They rarely eat out and still practice such economies as going to movie matinees to save on tickets and shopping where they can get a discount.

The only thing they do now that they didn’t during the toughest years is subscribe to cable TV and splurge on the occasional big treat, such as a long-awaited ski trip to Whistler, Canada, this winter.

So far, the couple have accumulated $15,500 in their workplace tax-deferred retirement plans, to which they contribute the maximum each year--$13,000 in St. Jean’s 401(k) and $2,500 in Stephenson’s plan with the government.

St. Jean also has $15,500 in a traditional IRA, and the couple have $18,000 in money market and savings accounts.

“We’re at a point in our lives where we need to know if we’re going about all of this the correct way or if we can do things differently,” Stephenson said.

The answer to that is yes they are, for the most part, and yes they can, said Robert Wacker, a fee-only certified financial planner in San Luis Obispo.

“I think you guys have done a great job working toward your goals,” he told the couple.

“Your level of savings,” at 30%, “is just phenomenal and really unusual,” he noted. Wacker was also impressed that the couple whittled $24,000 in student loans to $4,600 in four years, and he foresees no problem in their meeting their target date of next summer for paying off the rest of Stephenson’s loan.

The couple say they’re eager to get some well-considered advice about investing, admitting that their current portfolio is more the result of offhand recommendations than research. Their approach, admits Stephenson, feels like “throwing at a dartboard.”

If so, then many of the darts are on target, because the couple have made some respectable choices, Wacker said. His suggestions were intended more as fine-tuning than an overhaul, to better diversify their fund choices and steer some of their money into funds that have been better performers and appear likely to remain so.

Being diversified is always important, but Wacker said it is especially urgent in times such as this with markets in turmoil all over the world. In fashioning a stock-heavy plan for the couple, Wacker noted that they are decades away from retirement age and say they are comfortable with risk.

St. Jean now has 50% of her traditional individual retirement account invested in the lackluster Fidelity Retirement Growth mutual fund (three-year average annual return: 17.2%), a large-cap fund that blends value and growth investing styles; 28% in Dreyfus Premier Core Value (three-year average annual return: 17.4%), a large-cap value fund whose performance has also been unimpressive; 15% in Fidelity Growth and Income (three-year average annual return: 24.5%) and 6% in the Fidelity Cash Reserves money market fund.

Wacker recommended reallocating 65% to Fidelity Growth and Income, a fund he called a consistently strong performer, and 35% to Fidelity Diversified International (three-year average annual return: 15.3%), which, Wacker noted, has a low risk rating compared with its peers. Future contributions would follow the same 65-35 split.

In her 401(k) plan, which includes a selection of about a dozen Fidelity funds, St. Jean has 44% in Fidelity Growth and Income, 44% in Fidelity Contrafund (three-year average annual return: 19.4%) and 5% in Fidelity U.S. Bond Index (three-year average annual return: 7.9%). She also can buy Amgen shares through the 401(k), and has been, with that stock now comprising 6% of her account.

Wacker, a fan of indexing when it comes to large-cap stocks, suggested that she put 60% of current and future savings into Fidelity Spartan U.S. Equity Index (three-year average annual return: 25.6%), which tracks the Standard & Poor’s 500 index, and cut her position in Contrafund, primarily a mid-cap fund, to 40%. For simplicity’s sake, St. Jean would exit Fidelity Growth and Income in her 401(k), keeping that fund only in her IRA. She would also, given her youth and preference for stock investing, Wacker said, drop U.S. Bond Index.

Roth IRA, Yes; Employer’s Stock, No

St. Jean would exit Amgen stock in her 401(k). However, she did ask the planner about buying it outside her 401(k) through the company’s stock-option plan. That would allow her to buy shares at a reduced rate for a total purchase of as much as 10% of her salary.

Wacker urged caution here. Generally, experts advise that individuals not have too great a percentage of their assets in their employer’s stock. That’s putting too many eggs in the same basket--you’re in effect depending on your employer not only for your job but also, through the stock, for your retirement.

Wacker advised St. Jean to regard buying Amgen shares as kind of a savings “extra.” If she does so, she should limit her stock-option purchases to 4% of her pay.

Diversification aside, there is the fact that Amgen is in the unpredictable biotechnology business, so investors can expect its stock to be volatile.

The investment selection available for Stephenson’s workplace retirement savings is limited to three--an S&P; 500 index fund, a fixed-income index fund and a government bond fund. Stephenson’s allocation is 70%, 20% and 10%, respectively, an allocation Wacker blessed.

However, the planner urged Stephenson and St. Jean to each start contributing the maximum $2,000 a year to a Roth IRA, emphasizing the Roth’s advantage of tax-free distributions in retirement.

His investment choice for those accounts: Vanguard Asset Allocation (three-year average annual return: 21.8%), which invests in the S&P; 500 stocks, Treasury bonds and some cash. However, the fund managers have the ability to switch allocations as they see fit. Besides being a diversified offering, Wacker said, this fund has made some prescient moves that helped it avoid volatility during a difficult period.

If the couple continue to invest $10,000 annually in their workplace retirement plans and $4,000 a year in Roth IRAs, Wacker said, then, assuming their investments perform adequately, they should be able to build an ample nest egg.

Wacker further advised St. Jean to convert her traditional IRA into a Roth. Generally, Wacker said, conversions make sense for people who are a long way from retirement and expect to be in a higher tax bracket when they get older.

“Cherie is 30 years from taking the money out,” Wacker said. “The power of long-term [compounding] and never having to pay taxes on the growth outweighs having to pay taxes now” on the sum to be converted.

Read the Fine Print on VA Loan

If St. Jean converts by Dec. 31, Wacker said, she can take advantage of a provision that applies to conversions made in 1998: She may divide the converted sum to be declared as income into four equal amounts over the next four years, which, depending on other factors, could reduce her tax liability.

When it comes to buying a home, the couple have some studying to do.

They admit having little idea what a three-bedroom home in their area would cost or how various types of mortgage loans work. They thought of getting a no-money-down Veterans Administration loan and buying before 2000.

Wacker pointed out, though, that the less cash the couple put down on a home, the higher the fee they would be required to pay on a VA loan. That charge can run as high as 2% for a VA loan with no money down. Furthermore, the couple are likely to find that lenders will not write a loan for more than $203,000. The planner thus urged the pair to save as much as possible for a down payment and to flesh out an idea of what they can afford.

“Give yourself some latitude, because Ventura is not a cheap place to buy a home,” Wacker said. “If you can put even 10% down, your VA fees may go down to 1% or 0.5%.”

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: Mark Stephenson, 34, and Cherie St. Jean, 29

* Occupations: Stephenson, prison guard; St. Jean, paralegal

* Combined gross annual income: $78,000

* Financial goals: Save to buy a home and for retirement

Current Portfolio

* Retirement accounts: St. Jean has $13,000 in her 401(k) plan, invested in her employer’s stock and three funds through Fidelity: Contrafund, Growth and Income and U.S. Bond Index. Stephenson has $2,500 in his tax-advantaged workplace plan, invested in a bond fund, a stock fund and a fixed-income fund. St. Jean has $15,500 in an IRA, invested in Fidelity Retirement Growth, Fidelity Growth and Income, Dreyfus Premier Core Value and Fidelity Cash Reserves.

* Cash: $18,000 in money market and savings accounts.

* Debts: Stephenson owes $4,600 on student loans.

Recommendations

* Reallocate savings in St. Jean’s tax-advantaged retirement accounts to achieve better diversification and drop lackluster performers in favor of funds that appear more likely to do better.

* St. Jean and Stephenson should each start investing the maximum allowed in Roth IRAs this year; St. Jean should convert her traditional IRA to a Roth.

* In regard to buying a home, which the couple want to do in about a year, they should educate themselves about the Ventura-area residential market and save as much as possible for a down payment.

Recommended Mutual Fund Purchases

* Vanguard Asset Allocation: (800) 662-7447

* Fidelity Diversified International: (800) 544-8888

MEET THE PLANNER

Robert Wacker, a fee-only certified financial planner, is head of R.E. Wacker Associates in San Luis Obispo. He is a past national president and chairman of the National Assn. of Personal Financial Advisors. He has been named one of the 300 outstanding U.S. financial planners by Worth magazine.