Retirement Planning? That Will Be Then, and This Is Now
Una Chung recently finished reading “The Millionaire Next Door” and can’t get the book out of her head.
“My next goal is to be a millionaire,” the 24-year-old legal assistant said with a laugh.
But first, she has to figure out a way to pay for law school. That’s assuming she’s absolutely sure she wants to make the law her life. After all, those millionaires profiled in the bestseller are all entrepreneurs. The prospect of having to go tens of thousands of dollars into debt to pay for law school isn’t one the debt-averse San Fernando Valley resident relishes. She’s eager to get started on an investing program now.
“I’m concerned,” she said. “If I attend law school, I’ll probably be 29 before I start seeing any money again. That’s several years of investing I’ll have lost.
“I’ve read that it is never too early to begin a retirement plan, and I don’t want to lose out on the value of compounding.” Then again, Chung says she has a genuine enthusiasm for the law.
Give Chung extra credit for thinking ahead and starting to educate herself about investing at a relatively early age.
But in seeking advice on an investment program at this stage, said Ken Kurson, a New York-based specialist in the finances of people in their 20s and 30s, Chung is getting a bit ahead of herself.
Moreover, in giving so much weight to a single book, she could find later that she’s set herself on a path that ultimately may not make her happy and thus may not make her wealthy either.
“There is no such thing as one-size-fits-all financial advice,” Kurson told her.
Before Chung can even think about a long-term investment program, she needs to step back and consider what she wants to do with her life, then set priorities among her goals.
Once she’s done that, she can start thinking about her future finances. That’s not to say she needs to make an immediate decision. If Chung realizes that she’s unsure, she can make flexibility a priority.
Beware of ‘Golden Handcuffs’
Fortunately, there’s no need to worry that Chung will be adding unnecessary expenses to a law-school debt that could total $90,000 by the time her name is added to the Parker Directory. Chung, who grosses $36,000 annually in her job at a Westside law firm, manages to save $200 to $400 every month and pays at least $50 extra on her undergraduate student loans by keeping a tight grip on her overhead.
How tight? Well, she recently went to the trouble to try to get an admittedly legitimate speeding ticket dismissed, thanks to a bit of legal maneuvering explained in a do-it-yourself book.
“It was one of the best experiences of my life,” she recalled, clearly relishing the idea of having won a court case all on her own as much as the fact that she saved $140 on the ticket.
She also points out that she paid off her car a few months ago, ahead of schedule. It wasn’t so much the interest she saved--it wasn’t sizable--it was just the idea of retiring a debt. To do it, she used an extra job payment of several thousand dollars and raided the $2,000 she had in savings.
She has the same attitude toward her undergraduate loan balance, now around $9,000 and carrying less-than-usurious interest rates around 8%.
Yet as focused as Chung may be on her finances, her vision of a professional future remains hazy. In one breath she talks confidently of obtaining a prestigious, high-paid associate’s position with an upper-crust law firm such as Los Angeles’ Gibson, Dunn & Crutcher, where beginning lawyers routinely work 12-hour days. In the next, she proclaims a deep interest in improving the lives of her fellow men by practicing public-interest law.
Then talk of that far-off time gives way to more immediate thoughts. “I’d rather be a student than a worker. I don’t like working 40 to 45 hours a week. I like late nights in the library. I’m not going to law school thinking there are big bucks after I graduate. I want to learn.”
For a law student, this matter of likes and dislikes can ultimately carry a lot of weight--and finances are a big part of the reason.
The Access Group, a Delaware-based nonprofit provider of law-school loans, reports that the average debt for 1997 graduates was $68,500.
“These students are paying for their education with future income,” said Jeff Hanson, an Access Group director. Because of the debt they’ve incurred, they have to stay in high-paying jobs they don’t enjoy. “We call it the golden-handcuffs problem,” he said.
Investigate Grant Programs
But that’s only one way to reduce law-school obligations. The other is to do what you can to borrow less or to participate in a loan-forgiveness program.
So instead of investigating mutual funds, Kurson said, Chung could spend her time more productively by looking into scholarship, grant and loan-forgiveness programs to minimize what she’ll owe once she graduates.
As it happens, at the University of Pennsylvania Law School, her first choice, graduates who take public-interest or government jobs are eligible for a loan-assistance program. Because those fields tend to pay less, the program forgives a percentage of the loans according to a formula based on salary and other considerations. Here’s how it might work: A Penn law graduate in an eligible position paying $40,000 annually would qualify to have the school pick up any loan payments in excess of $5,300 per year. (The school caps its contribution at $8,000 per person annually.)
In addition to researching general aid programs, Chung should see what specialized kinds of grants or scholarships she might qualify for.
For instance, Chung, a first-generation American who also speaks Korean and Spanish fluently, might apply to the Paul and Daisy Soros Foundation in New York City, which offers grants for the higher education of the children of immigrants.
Or she might try investor George Soros’ Open Society Institute, a charitable foundation that, among other things, sponsors about 70 two-year fellowships--providing salary and loan-repayment assistance--for recent law graduates with an interest in public service. (More information on Soros’ social and political organizations is available on the World Wide Web at https://www.soros.org.)
As for retirement savings, Kurson says, forget it.
Not that thinking about it now is a bad idea. Chung had come to the planning session with the intention of starting a Roth IRA this year and asking Kurson’s suggestions about a good investment vehicle for those savings.
And it’s true that after a year passes, she’s lost the chance to make a tax-deferred savings contribution for that year.
But the reality for Chung is that she has every reason to expect that she’ll attend an expensive private law school, and thus, Kurson gently pointed out, will need every cent she has. This is no time to have money tied up in restricted--not to mention risky--investments.
Build Cash, Despite Debt
There are steps, however, Chung can take to improve her financial position. Kurson suggested she boost her monthly savings by ceasing to pay any more than the minimum required on her current student loans. Again, paying off debt ASAP is usually a good idea, but Chung is going to need all the cash she can muster for school and living expenses.
Not only that, but by paying her student loans early, Chung is giving up a tax break. The first $1,000 of student-loan interest is deductible for the 1998 tax year for singles who make up to $40,000 or marrieds who make up to $60,000. (A smaller deduction is available to singles who make up to $55,000 and marrieds who make up to $75,000.) The interest deduction limit increases to $1,500 for the 1999 tax year.
As she builds up her savings again, Kurson said, Chung might want to place it in a money market mutual fund with a discounter such as Charles Schwab or Fidelity. Such funds often pay significantly higher returns than a bank savings account, Kurson explained.
And, finally, once Chung is back in the work force, the Student Loan Marketing Assn., also known as Sallie Mae, has a way to encourage prompt payment of bills. Its so-called Law Returns program gives a borrower who makes 48 payments on time a 0.5% reduction on the interest remaining on his or her loan. (Those seeking further information should visit Sallie Mae’s Internet site, https://www.salliemae.com.)
Chung now realizes that before she can aspire to being compared with the likes of Warren Buffett or Ralph Nader, she faces some hard financial decisions.
“I’m not yet in the position I wanted to be in,” Chung said. “I want to be able to save, but I guess I’ll have to spend first. I just didn’t put the two together.”
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Helaine Olen is a regular contributor to The Times. She can be reached by e-mail at holen@aol.com. 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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Information about choosing a financial planner can be found at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.
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This Week’s Make-Over
* Investor: Una Chung, 24
* Occupation: Legal assistant
* Gross annual income: $36,000
* Financial goals: Begin retirement savings plan; prepare to attend law school
Current Portfolio
* Cash: $500 in bank savings account
* Debts: $9,300 in student loans
Recommendations
* Saving for law school should be the first priority. Chung should stop making more than minimum payments on current student-loan debt and save those amounts instead.
* Postpone opening an IRA or taking other retirement-investment steps until out of law school and back in the work force full time.
* Look into general law school financial assistance as well as scholarship and grant programs.
* To earn good returns on savings, put them in a money market mutual fund.
Meet the Planner
Ken Kurson is the author of the book “The Green Magazine Guide to Personal Finance” and is the founder of Green, a New York-based personal finance magazine for people in their 20s and 30s.
