Immigrants’ American Dream: Add Stocks, Retirement Plan

For Max Xuan Do, 45, and his wife, Phuong Tuyet Lam, 35, the United States represents the freedom to choose. Since escaping Vietnam via separate boats and refugee camps and then meeting each other for the first time in Southern California, the couple have chosen well.

By starting a family, buying a home in Lakewood, operating a small business and acquiring three residential rental properties, the immigrants are living what many would consider the American dream.

The Dos have amassed a net worth that probably exceeds $750,000, a result of long hours, frugal habits and lucky timing in the real estate market. But much of their wealth is tied to “illiquid” assets that cannot be converted easily or quickly to cash--specifically, their real estate holdings and their video rental shop, Laser Video Max in Long Beach.

The Dos fled Vietnam because they sought the political and personal freedoms of the United States. They did not anticipate the vast array of investment choices--and find them overwhelming.

So far, they have played it safe, investing in the rental homes and saving in ways that guarantee principal but offer relatively low returns: a bank savings account, a certificate of deposit and U.S. Savings Bonds. Even these vehicles required a leap of faith. In Vietnam, Phuong Lam recalls, people who saved money usually did so by hiding their cash or buying gold. There was no Vietnamese stock market and the idea of growth investing was foreign to them.

Although they describe themselves as conservative investors, the Dos said they would like to take some risks in hopes of getting higher returns. More important, they wanted to know the best ways to save for retirement and their children’s college educations.

Phillip E. Cook, a certified financial planner in Torrance who evaluated the Dos’ finances at The Times’ request, said the couple should invest in the stock market to stay ahead of inflation and to diversify their portfolio for the long term.

“Max and Phuong have assets that aren’t working effectively for them,” Cook said, referring to their bank and bond savings of about $74,000. “They need to invest more aggressively.”

Laura Tarbox of Newport Beach, another certified financial planner who also reviewed the Dos’ situation, noted that the couple’s rental properties, all in Southern California, make their overall portfolio too heavily weighted in regional real estate. Stocks, which usually offer higher returns and are easier to sell in small chunks, could help balance their holdings, she said.

Because the Dos are comfortable owning and managing property and it provides cash flow, neither Tarbox nor Cook suggested that they sell their rental homes. Besides, Do said, he enjoys the physical work of making minor repairs as a break from the hours he spends indoors, behind the counter of the video shop.

The benefits of rental property include the regular income, tax deductions and leverage--the ability to own a large asset with a small down payment. The disadvantages are the time, trouble and expense associated with maintaining, insuring and selling real estate. And, Tarbox notes, every landlord risks experiencing “the tenant from hell.”

Starting to Invest in the Stock Market

The planners recommend that the Dos start investing in stocks, even with the risk that stock prices may fall from recent record highs.

“I think there’s more risk being out of the market than in the market,” Cook said, because it is easy to miss bull markets. “When the market moves up, most of the gain takes place in the beginning.”

Cook proposed that the Dos invest in mutual funds, both mainstream equity funds and funds that focus on undervalued segments of the market, such as foreign equities and stocks of small and mid-sized companies.

Of the Dos’ $74,000 in savings, at least $20,000 should be held in a money market fund that could be tapped for such emergencies as a tenant skipping town or unexpected medical expenses, Cook said. Although not government guaranteed, money market funds are very safe and offer higher returns than most bank accounts.

Before switching any investments, Cook warned, the Dos should think carefully about whether they can live with a sudden plunge in stock prices--25% or more--and not sell in panic.

If they accept those risks, Cook suggested investing most of the money in equities now. But if the Dos cannot bring themselves to convert their savings to stock mutual funds in one fell swoop, they can test the waters gradually.

Tarbox suggested dollar-cost averaging, that is, investing a set amount each month.

By buying this way, Tarbox said, investors get more shares when prices are low than when they are high.

“Dollar-cost averaging reduces the risk of buying all the stocks at once, maybe at a high price, and having the market crash the next day,” she said. “The Dos do need to invest in stocks for growth. Even when you retire, you need to be investing for growth.”

The Dos are keenly interested in establishing a retirement savings plan, a concept that was once foreign to them.

“In Vietnam, there is no retirement planning,” Max Do said. “The children always take care of their parents when they get old.” Having adjusted culturally to the United States, the Dos want to maintain their independence as they age and have the financial freedom to travel and study when they stop working.

Cook noted the Dos’ rental properties should provide them a comfortable retirement income after the mortgages are paid off, but there are significant advantages if they set up formal retirement investments as well. Both would be supplemented by Max Do’s Teamsters pension, which is based on his 15 years working as a technician in the dairy industry. For eight years, he held that job while operating the video shop and managing the rentals.

Small-business owners can choose from among several tax-deferred retirement savings plans that are similar to IRAs or 401(k) plans.

Cook suggested a simplified employee pension-individual retirement account, or SEP-IRA, which allows unincorporated business owners to save as much as 13% of net revenue, or $24,000 a year, whichever is less.

The SEP-IRA rules stipulate that small enterprises include employees who have worked there more than three years, Cook and Tarbox cautioned. But “as long as no one [employee] sticks around too long, it would work out fine,” Tarbox said. “The SEP-IRA is one of the cheapest plans to set up and administer. It’s flexible. The owner could make a contribution one year and not make one the next year.”

Another option is the savings incentive match plan for employees-individual retirement account, or SIMPLE-IRA. One advantage is that it requires a small-business owner to contribute only for those employees who set aside retirement savings for themselves. However, an owner cannot save as much within the SIMPLE-IRA, which has a $12,000 annual limit.

Cook calculated that Do could squirrel away nearly $9,000 a year for himself under a SEP-IRA, compared with about $7,400 with a SIMPLE-IRA.

If the Dos’ video business expands, they might want to factor in the cost of including one or more workers in the retirement plan. But now, their employees are all part time and generally work a year or less. Thus, they may not have to contribute to employees’ accounts under either plan.

Roth IRAs Offer Another Good Option

In addition, Tarbox said the Dos are likely to benefit from Roth IRAs, which are not tax-deductible but do provide tax-free growth and retirement income. They are more flexible than other retirement plans and do not penalize the withdrawal of contributions, which could help small-business owners in a pinch, Tarbox said. The Dos can contribute to a Roth as long as their adjusted gross income remains under $160,000.

After they take full advantage of tax-deferred retirement plans, they can save for their children’s college expenses.

The Dos’ eldest child, Brianna, 9, is already talking about becoming a teacher or doctor, Phuong Lam said, while the youngest, Dee Dee, 5, has an affinity for ice skating. Max Jr., 8, speaks of wanting to travel.

For starters, Cook recommended education IRAs, which allow annual contributions of $500 per child. Such accounts do not offer tax deductions, but the income they create is tax-free provided that the money is spent on qualified educational expenses--that is, books, not beer.

Education is a topic dear to Max Do’s heart. In Vietnam, he studied to become a veterinarian specializing in farm animals. However, he thought the expense of getting properly trained and licensed in the United States was too great. He said he hopes to take college courses in English and French when he retires.

Cook encouraged the Dos to do some basic estate planning and draft wills--for the primary purpose of identifying guardians to care for their children. The Dos might even consider creating a living trust, which costs money to set up but can save probate expenses and headaches later.

An estate-planning attorney can help the Dos with strategies to reduce potential estate taxes.

Other financial housekeeping chores include scrutinizing all insurance policies, and considering whether their savings are protected from any lawsuits arising from their businesses.

By grouping all of their policies with one insurer or setting higher deductibles, the Dos might reduce their premium expenses, Cook said. He advised them to increase their life insurance coverage to $250,000 for each parent, up from $100,000 currently.

Cook challenged the Dos to think beyond their immediate concerns of getting higher investment returns and planning for retirement.

He noted that new technology could threaten the long-term viability of Laser Video Max. “If video-on-demand becomes widely available,” Cook speculated, “that could put you out of business. Think about that. Develop a contingency plan. Maybe there are ways to diversify.”

Although he is aware of those dangers, Max Do said, he is not overly concerned, because he has always been able to earn a living in the United States.

“I have had a lot of opportunity here,” he said. “You can achieve your goal. I am fulfilling my American dream. It’s a little dream, not a big dream.”

Suzy Hagstrom is a regular contributor to The Times. 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. You can also e-mail this information to money@latimes.com, or you can save a step and print or download the questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/make-over.htm.

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This Week’s Make-Over

* Investors: Max Xuan Do, 45, and Phuong Tuyet Lam, 35, entrepreneurs with three children.

* Gross annual income: About $55,000.

* Goals: Invest for retirement, save for children’s college education.

Current portfolio

* Real estate: Lakewood home with about $180,000 equity. Three residential rental properties with a combined equity of about $350,000.

* Small business: Laser Video Max in Long Beach, a video-rental store.

* Cash and savings: $54,000 in bank savings and checking accounts; $20,000 in U.S. Savings Bonds earning 5.75%.

* Debts: Mortgages totaling $410,000 and a $6,000 car loan at 8.25%.

* Insurance: Policies of $100,000 each for Max and Phuong.

Retirement accounts

* None, except Max is eligible for a small pension.

Recommendations

* Pay off car loan.

* Set aside at least $20,000 in a money market fund for emergencies, then invest remaining cash and bonds in stock market, both directly and, after they are set up, through retirement plans.

* Set up education IRAs for each child.

* Increase life insurance coverage to $250,000 each; consider umbrella liability policies; draft will and consider creating a living trust.

Meet the Planners

Laura Tarbox, a fee-only planner, is president of Tarbox Equity Inc. in Newport Beach. Worth magazine ranked Tarbox among the nation’s top 200 financial advisors in 1996, 1997 and 1998.

Phillip E. Cook is a certified financial planner in Torrance, handling clients on both a fee-only and commission basis. He is affiliated with Financial

Network Investment Corp., a broker-dealer.