Couple Hopes Drop in Income Won’t Change Lifestyle
At first blush, Paul and Alejandra Flor appear to be an “after” picture of the perfect Money Make-Over.
The couple earn more than $150,000 annually, have nearly $170,000 saved for retirement, own their own home and have two rental properties.
But a few cracks appear in this perfect veneer when you look more closely. For instance, though the Flors appear to have it all, they also have a lot of pressure to keep it up. Paul, 37, works two jobs, earning about $110,000 a year.
He teaches full time at Compton College and works part time as a vocational instructor for a Hacienda Heights adult school. Wife Alex, 31, earns about $45,000 annually as a graphic designer for an Orange County publishing firm.
Paul would like to go back to college to earn his doctorate, but worries that he’ll derail their ambitious financial plans if he has to cut back on his work schedule. Among other things, the Flors want to supplement their parents’ retirement income, perhaps help a nephew pay for a private college and ensure that they can retire with enough resources to travel widely and enjoy themselves.
They also want to continue to enjoy some luxuries, such as their his-and-hers leased BMWs and exotic vacations.
Fortunately, thanks to all the planning ahead, this dual-income couple can probably finance all their wants and wishes, as long as they are clear about what they want and are mindful of the price tags on their goals, said San Francisco-based financial planner Margaret Gault.
“But they are to be congratulated for commencing and continuing their retirement savings program,” Gault said. “They’ve made an excellent start.”
The Flors, who celebrated their 10th wedding anniversary in August, have no children and say they don’t plan to have any. They remain close to their families, however.
The couple live in Avocado Heights, an unincorporated community near Industry. Paul purchased the home before his marriage to Alex, a period that saw him dabbling in several real estate ventures with his brother.
“[My brother and I] had three income properties together, but because I was going to get married, we took one each and liquidated the other,” said Paul, who took his share of the money and used it as a down payment on the Avocado Heights house.
He still owns the other piece of property left from the split: a planned-unit development in Whittier that he rents out. The Flors have about $75,000 of equity in their $245,000 home and about $54,000 of equity in the $140,000 Whittier property.
They recently spent $50,000 to double the size of their house and add several improvements. “We financed $25,000 and came up with the other $25,000 ourselves,” Paul said. “We had been thinking about moving to the Fullerton area, but now we’ve got the house we want, right here.”
Alex, meanwhile, inherited a quarter-share--worth about $50,000--in a residential property in Costa Rica. The couple plans to develop it into a commercial building along with the other family members.
“We’ll convert it to two stories of retail space,” Paul said. “It’s in an excellent storefront location in the city of Alaguela. It shouldn’t cost more than $70,000 or $80,000 to convert it.”
The Flors admit that their spending habits have been an occasional source of concern. For instance, the BMWs cost $1,200 a month. And they recently splurged on a dream vacation to Italy with friends. “And we just booked a trip to Tahiti for July,” Alex said.
Added Paul: “We used to spend a lot of money on clothes, but we’ve tried to cut down on that. We also like to eat out two or three times a week, and that can add up.”
A primary reason the Flors want to make sure they’re financially secure is so they can be in a position to help family members. For instance, the Flors expect to eventually shoulder some of the responsibility for supporting their parents, who the Flors say have not planned sufficiently for their own retirement.
“My parents live in the area, and my wife’s mother lives in Pennsylvania,” Paul said. “It looks as if we’re going to have to shoulder some of their shortfalls.”
The couple also wants to do whatever they can to help other family members.
“For example, when one of my nephews was born, I helped organize the family into buying some Disney stock for him,” Paul said. “He now has 28 shares, and we also have him into some aggressive mutual funds. He has a pretty neat portfolio, and he’s only 10 years old.
“He wants to go to Stanford, and I’m hoping to help him get there and be able to afford it when he does.”
On the subject of education, Paul, who has two master’s degrees, wants to return to school to get his doctorate, but the couple worries about the impact on their income. Alex, meanwhile, said the nature of her graphic arts job means that she is constantly updating her skills. She currently is attending UCLA, another cost factor.
All of these priorities add up to a pretty tall order, even for a couple as well-situated financially as the Flors.
“That’s why it’s so important for us now to do everything we can with our money,” said Paul, who learned about money management by reading magazines and newspapers and watching financial news on TV.
“I knew from the beginning the importance of accrued interest, so as soon as I became eligible, I started putting away whatever I could in my 403(b) [retirement account],” he said. “It was only $50 a month at first, but now I put away the maximum allowable, $10,500 a year. My wife maxes out on her individual retirement account too, so I think we’re doing everything we can.”
The Flors are doing the right thing by saving aggressively, but the way they’ve invested their retirement savings is far too complex, Gault said.
She noted that the couple has amassed nearly $170,000 in mutual funds, Alex’s IRA and Paul’s 403(b)--a type of tax-deferred retirement account available to teachers and employees of nonprofit groups. But the mutual fund investments are spread across 20 accounts, a cumbersome setup that results in duplication.
Gault suggested liquidating most of the smaller accounts, some of them $1,000 or less, and reinvesting the money in a handful of their remaining funds.
“Some of their larger accounts, such as the Oppenheimer Global and Janus International Growth, are fine,” she said. “And the Dreyfus Index should be kept to balance the more aggressive funds.”
Gault also recommended paying off a $4,000 loan from a retirement plan and a consumer loan of about $4,000. “I believe strongly that paying off debt is the most efficient way to save money, unless it is home mortgage debt with deductible interest.”
The Flors were advised to retain a reputable estate-planning attorney to prepare a revocable living trust to save probate fees and ease transfer of property at the death of the first spouse.
Gault was a bit dubious about the Costa Rica plans.
“There are often many unanticipated problems for persons investing in real estate and businesses in a foreign country, even a country friendly to the U.S.,” she said. “These problems can include such matters as laws and practices that discriminate economically against foreigners, how title to property is held, taxation issues and transfer from the foreign country of dividends, capital gains and other distributions.”
Gault said the Flors should avoid using their own capital and advised against borrowing on their house or retirement funds to finance the project.
The Flors said they saw value in Gault’s suggestions and that trimming the number of mutual funds in their investment portfolio made sense. They were also gratified to know that Gault thought they were on track to a financially secure future.
“When I turn 55 or so,” Paul said, “I want to continue working because I want to, not because I have to.”
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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
* Investors: Paul Flor, 37, and Alex Flor, 31
*n Gross annual income: $155,000
* Goals: To maintain lifestyle even if income is reduced because of education plans, spending on family members and saving for retirement
Current Portfolio
* Cash: $1,000
* 403(b) accounts: $17,000 in annuities at National Western Life and Northern Life
* Mutual funds: $150,000 in 20 funds
* Other assets: 1993 Honda Accord LX
* Real estate: About $75,000 of equity in their home and $54,000 in rental property, and a quarter-share of a $200,000 family property in Costa Rica
* Debt: Two loans totaling about $8,000
Recommendations
* Consolidate the mutual funds and limit holdings to four or five funds.
* Be patient. Generally, hold on to funds for at least three to five years before considering a new direction.
* Pay off the two loans before investing more money.
* Continue aggressively putting away money for retirement.
Meet the Planner
Margaret Gault is a certified financial planner in San Francisco. She specializes in portfolio management, retirement planning, retirement distribution rules and estate planning.
