Carefully Choosing Their Financial Steps

Gordon Lewis describes himself and his wife, Claudia, as “sort of Hollywood expatriates.”

Fed up with the entertainment business, they ditched potentially lucrative careers in the mid-’90s--Gordon as a sitcom writer, Claudia as an executive in script development at a production company--to start over in technology.

“Disillusioned doesn’t even capture it,” Gordon, whose writing credits include work on “Family Matters,” “Amen” and “In Living Color,” said of their feelings toward Hollywood. “We moved into an area where we felt our talents would be better recognized, where there was less subjectivity and favoritism involved.”

Claudia wanted out because of the time commitment.

“In order to be at all successful,” she said, “you have to make a lot of lifestyle changes that I wasn’t willing to make. I wasn’t willing to work 20 hours a day. . . .

“I knew that family was going to be a priority, and I wasn’t willing to eat, sleep and breathe my job.”

The career changes have turned out well for the couple, considering Claudia works only part time as she pursues a graduate degree in business at UCLA. Together, the couple earn about $100,000 a year--more than they made in Hollywood.

Gordon, 46, is an instructional writer for a maker of CD-ROM-based training programs for Fortune 500 companies, and Claudia, 32, is a computer consultant at UCLA.

The Lewises bought a house in Leimart Park last year and started a family. Their daughter, Nia, will be 1 this month, and they plan to have another child in the next year or so.

They’re concerned, though, about the cost of living in Los Angeles.

“It’s very expensive here, and we don’t feel we need to be here to realize our dreams,” said Gordon, mentioning the Research Triangle area of North Carolina as a possible future home for the family. “We’ll probably move when Claudia graduates [in 2001], depending on what jobs she might pursue or be offered. We like the idea of being able to get more home and more land and a better quality of life.”

Their current non-mortgage debts are few--about $10,000 altogether, most of that a home equity loan. One of their two cars is owned outright and the other one will be in less than a year. But they have not saved much for retirement and will have to start paying off graduate-school loans of about $50,000 after Claudia graduates.

“When I decided to have a baby at the same time I was going to business school,” she said, “I knew that meant we were going to have a couple of lean years, but it’s literally an investment in the future.”

She believes she needed to pursue an MBA to advance her career.

“I was going from one company to the next and finding that all I was learning about was that particular company,” said Claudia, who already left the entertainment business before returning to school. “I wasn’t learning to be a leader or a manager.

“And, in computers, a lot of companies are failing, so I was getting all this experience seeing what’s wrong and I wasn’t really getting any learning about how to do things right.”

Upon graduating, she expects to earn upward of $90,000 a year as a consultant in education technology, which would increase the family’s annual income to about $150,000.

When they ponder how to invest their money, however, the Lewises don’t know where to start.

“I’ve read some of the financial guides,” Gordon said, “but it’s sort of hard to figure out among the different options which is best. There are so many different options, and they all seem like good ideas, but what’s best for us?”

Scott A. Leonard, a fee-only financial planner based in El Segundo, reviewed the Lewises’ finances for The Times, looking for answers.

The couple have neglected some insurance and contingency issues regarding their daughter, he said, but have avoided excessive debt. He suggested that, with a little research, they should be able to manage their own portfolio, especially as they are starting out.

Other than their house and cars, the Lewises’ assets are few. They have about $10,000 in checking accounts, Claudia has about $5,800 in a 401(k) account from a previous job and Gordon has about $750 in an individual retirement account. Gordon also has about $12,000 in a Writers Guild of America account that will pay him a small pension when he retires.

Leonard said Gordon’s first step should be to make retirement saving a top priority through his company’s 401(k) plan.

“You need to start saving aggressively,” Leonard said. “You need to get into the habit of saving. You have very little in the way of retirement savings, especially for your age.” When Claudia is working full time, as much of the additional income as possible should be directed into savings.

Even before they start saving, however, the couple should invest in life insurance and a will or trust, the planner said, to protect each other and their daughter.

“My personal feeling--and the feeling of the financial-planning community in general--is that you’ve at least got to have wills set up and the right custodial arrangements set up the second you have children,” Leonard said. “That’s just prudent family planning.”

Not having such documents in place “is the biggest hole in your overall financial situation,” the planner told the couple.

“If something happens to both of you,” he said, “it could create a huge nightmare in terms of what happens to Nia. Who’s going to take care of her? Do they have the money to take care of her? Will there be a grandparents’ battle?”

Leonard strongly suggested that the couple hire a lawyer, who could spell out their wishes in “litigation-proof” documents, Leonard said.

A will is sufficient to name guardians for their daughter and specify how their assets are distributed, but they also should consider living wills and durable power of attorneys to guide health decisions in case they cannot communicate their wishes. A “living trust” is a convenience for their heirs, saves the cost of probate and allows them to delay the date their child has control of their assets, but is less urgent for the Lewises. Depending on the complexity of the documents--and the cost of the lawyer--they can expect to spend $500 to $3,000.

The other immediate priority, Leonard said, is that until they build a more considerable nest egg, the Lewises should each take out a $1.2-million term life insurance policy, decreasing the worth of the policy as their savings grow.

To build assets, the planner suggested that the couple open a brokerage account at a discount brokerage such as Charles Schwab or Waterhouse Securities, funding it initially with the money from their checking accounts. All of their income, he said, should be funneled through this account, making it easier to track expenses.

“This basically becomes the accumulation account for everything that you have,” Leonard said. “It gives you check-writing ability, a debit card . . . and you can buy stocks, bonds and mutual funds through this account. . . .

“It’s a great cash-management tool. And then, when the account starts to build, you can start to invest some of the money.”

Leonard said that both Claudia’s 401(k) and Gordon’s small IRA should be rolled over into Roth IRA accounts. (Claudia’s funds would have to go into a regular IRA first.) Although they would have to pay income taxes on the conversion amounts this year, the principal and future earnings in the Roth IRAs would never be taxed if withdrawn in retirement. Also, the Roth IRAs can serve as a kind of last-resort emergency fund, because there is no penalty for taking out the principal.

Leonard also noted that they should remember that as long as their income is low enough to keep them eligible, they should fund the Roths with the maximum $2,000 apiece each year before making any taxable investments.

Leonard suggested that at first, they can invest in Schwab MarketTrack All Equity, a “fund of funds” that invests in a wide variety of U.S. and international stocks, or in a pair of Vanguard funds, Total Stock Market Index and Total International Stock Index, with about two-thirds of the money going into the Total Stock Market fund. All these funds are new, but the two U.S. funds perform very much like the overall stock market, having returned more than 20% in the last year. The international fund, intended to perform like foreign markets, has performed even better, with a 27% one-year return because of recovery in the Asian and European stock markets. Although the 1990s has been an unusually good period for equities, such investments have outperformed bonds, bank accounts and other alternatives over any long periods in this century.

“These funds are what I call buy-and-forget funds,” he told the couple. “It’s kind of a no-brainer. You put the money in and you don’t think about it, and they’re going to give you great diversification.”

Later, for diversification, Leonard said, the Lewises might consider a bond fund such as Payden & Rygel. More specialized funds could be added when their savings grow.

Also, whenever a “tax-saver” plan is available through either’s employer, the couple should participate. These programs allow employees to set aside dollars on a pretax basis, with the requirement that they choose the amounts ahead of time and spend them on child care or medical expenses. As long as they don’t set aside too much money, these programs permit indirect, but significant, tax savings.

The Lewises were eager to put Leonard’s suggestions to work.

“It was very helpful in terms of helping us prioritize,” Gordon said of the planner’s advice. “I found it very useful in terms of, ‘This is what you need to do now.’ I feel that, having gotten solid grounding, we’ll know what to do when our income increases in the future.”

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Jerry Crowe is a Times staff writer. 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 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.

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This Week’s Make-Over

* Investors: Gordon Lewis, 46, technical writer, and Claudia Lewis, 32, part-time computer consultant

* Income: About $100,000

* Goal: Learn more about investing for retirement

*

Current Portfolio

* Checking accounts: About $10,000

* Pension: Account valued at $12,000

* 401(k): About $5,800

* Individual retirement account: About $750

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Debt

* Mortgage: About $165,000

* Home equity loan: About $8,000

* Car loan: About $2,000

* Student loans: $1,000 left on older loan, but $55,000 in additional loans expected from Claudia’s business school costs

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Recommendations

* Buy life insurance and draft a will to protect daughter.

* Begin contributing to 401(k) plan, convert existing retirement accounts to Roth IRAs and start saving as aggressively as possible, initially in broad equity index funds.

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Meet the Planner

Scott A. Leonard is a fee-only certified financial planner and registered investment advisor. His firm, Leonard Capital Management, is in El Segundo.