A Couple’s Plan to Keep Everyone Happy

Having six people living in a two-bedroom house has left Wayne and Mona Skinner with just one big wish: a room of their own.

The Los Angeles couple share one bedroom with their two children while Mona’s parents live in the other. It wasn’t an issue when the Skinners bought the house six years ago, but the quarters are claustrophobic now that their older child is 12.

“We need to buy a house where we can all fit,” said Mona, 30, with a characteristic bright smile. “When the kids are out of the house, we can go back to something smaller. But until then, we need three bedrooms.”

The catch: Although Mona, a shipping clerk, and Wayne, a pressman, can afford a bigger house, they also want to move closer to Mona’s job. They’re looking at houses in Lakewood and Downey, but Mona’s parents, John and Carol Cota, don’t want to leave their downtown Los Angeles neighborhood, where they have lived all their lives. Complicating matters is that the Cotas aren’t working.

After years as a roofer, John Cota was recently felled by a disability. His union has been providing a small stipend to keep him going, but it’s a far cry from a living wage. The Cotas, who are less than 20 years older than Mona, don’t have retirement savings either. Their living arrangements are by necessity rather than choice.

That makes Wayne and Mona liverwurst in the growing “sandwich generation,” said Percy E. Bolton, a Pasadena-based financial planner who reviewed the Skinners’ situation for The Times. How can the Skinners, who earn $40,000 to $50,000 annually, provide for their own retirement and personal goals when they’re taking care of both children and helping support Mona’s parents?

“In order to do a financial plan on the Skinners, you have to do it on the in-laws--or at least get enough information to know how much they [the Skinners] may have to subsidize in the future,” Bolton said. “Some families actually include their parents in their annual budget.”

Families that don’t have sandwich generation issues may think that this is a simple problem and might suggest that the Skinners put their needs and the needs of their young children first. But it’s not that simple.

Mona’s parents were also a sandwich generation--they had moved into the current family home first, to help Mona’s grandparents when they had trouble making ends meet.

When Mona’s grandmother put the two-bedroom house up for sale, the Cotas couldn’t afford to buy it at the $80,000 asking price. That’s when the Skinners stepped in, knowing that the Cotas came with the house.

In the ensuing six years, there have been many advantages to cohabiting, including built-in baby-sitting and the warmth of a close-knit family, the Skinners say. Additionally, because they were such young parents--Mona gave birth to their son, Matthew, when she was barely out of high school--she also needed lots of help and advice from her mother, Carol, who gave birth to Mona when she was just 18.

“My parents help us a great deal,” Mona said. “I’d be lost without my mother.”

The good news is that with a little luck, this couple can make it all work, largely because they’ve been thrifty throughout their marriage.

Most importantly, they are already well on the way to breaking the chain of dependency on the younger generations in their family. At this point, their only debt boils down to a $73,000 home mortgage; an $18,000 car loan; and about $700 in credit card bills, which will soon be paid off. Meanwhile, they’ve got between $50,000 and $65,000 in equity in their home, emergency savings of about $9,000 and retirement savings of roughly $36,000.

But meeting everybody’s short-term needs will be tricky.

Their future hinges on the house. Their home, a modest stucco bungalow wedged among several apartment complexes, has a one-bedroom guest house in the back that Wayne and Mona rent out for $500 a month. If they can get city approval, they believe they can make everyone happy by splitting their lot in two. They’ll sell the two-bedroom home in front and keep the one-bedroom guest house in the back. The Cotas could live in the guest house rent-free, at least until they get back on their feet.

Meanwhile, Mona and Wayne could take the profit from the sale of the two-bedroom bungalow and reinvest in a bigger house.

The couple have researched the market and believe that their house could sell for between $135,000 and $150,000. That would allow them to pay off their current $73,000 mortgage and reinvest between $50,000 and $65,000 in a new home, after commissions and costs.

The houses that the Skinners like in Lakewood and Downey are pricey--$200,000 and higher--given their budget. However, Bolton believes they can handle mortgage payments of up to $1,500 a month as long as Mona goes back to full-time work.

But Wayne, 33, who is the more cautious of the two, is uncomfortable with taking on a lot of debt. He knows they can make $1,500 payments when he works a lot of overtime, but he can’t count on that.

To reduce monthly payments, he’d like to use all the cash they get from the sale of their house for the down payment on the new home. That could let them buy a $200,000 home with just a $140,000 mortgage. Assuming an 8.5% loan, that would leave them with monthly payments of $1,080. With property tax and insurance, their total housing costs would run about $1,200 monthly, which they could handle without overtime.

Although it seems conservative, that is probably not the safest plan. Bolton advised the Skinners not to sink every dime back into a home.

Why? Flexibility.

If the Skinners put down 20%, or about $40,000, they’ll have at least $10,000 to $20,000 left over that they can put in emergency savings. That could cover their mortgage payments for a year or more, which would be invaluable if one of them lost a job.

“Typically, we find that when you have money, you don’t have difficulties. It’s when you don’t have cash that you have financial emergencies,” Bolton said.

Some might respond that they could always draw equity out of the house later in an emergency, by taking out a home equity loan--but that assumes the home retains its value, which might be at risk in a general economic downtown that helps cause financial problems in the first place. Bolton also noted that the loan payments might be excessive if one or both of them were unemployed.

The Skinners have two other goals: accumulate sufficient retirement savings, and create a college fund for their children--Matthew, 12, and Claudia, 5.

Wayne has been saving for retirement through a 401(k) plan since he started work at Color Graphics in Los Angeles nearly a decade ago. At first, contributed just a tiny fraction of his income. Now he’s up to 10% of wages, but feels his account is growing slowly. It’s worth just $28,109.

Bolton said this is not a worry. In fact, accumulating the first $100,000 in savings is always tough because the interest and investment returns you are earning are small. Later, growth is more dramatic.

“That’s why it’s so important to start saving early,” Bolton said. Thanks to compound interest, “you will be amazed at how fast that money grows.”

Moreover, when Mona starts working a full-time schedule, she’ll qualify for benefits at a marketing and consulting company, where she works in the shipping department. That will allow her to contribute to retirement savings again.

Bolton suggested that they tinker a bit with the investment mix in Wayne’s retirement account. Right now, Wayne has invested nearly half of his 401(k) in big-company stocks; 11% in small-company stocks; and 14% in international stocks. The rest--27% of his retirement portfolio--is in fixed-income and money market accounts. While the multi-sector fixed-income account he’s in helps diversify his retirement savings and is a good choice, there’s little need for low-risk, low-yielding money market savings.

Instead, Bolton suggested that Wayne put more money in the big-company stock fund and the fixed-income fund.

He’d also cut their international exposure in half. These shifts won’t substantially increase the risk in their portfolio, but it should modestly boost their return over long periods, Bolton said.

Mona has roughly $7,800 in a rollover IRA from a former employer. The account is with Investment Co. of America, a highly rated large-company stock fund. Bolton would leave this investment alone, although Mona could transfer it back into a 401(k) when she is eligible again.

The college savings dilemma isn’t quite as simple. That’s partly because the Skinners won’t have a lot of money left to invest after paying for the house and their other monthly expenses. Most mutual funds require at least $50 monthly deposits, if you don’t have at least $1,000 to $4,000 to put in at the start. Additionally, although they’d like the kids to go to college, they are not sure if they will.

“No one in my family has ever gone to college, so I’d love to see my son go,” Wayne said. “We’d like to help however we can.”

Given these restraints, Bolton suggested that the Skinners check into the California college savings plan called Scholarshare. It has low investment minimums, a widely diversified asset mix, good fund managers, tax advantages and flexibility. If Matthew doesn’t go to college, the amount saved on his behalf can be transferred to Claudia, Bolton noted.

One last item struck Bolton as a concern: The Skinners have very little disability or life insurance. With a young family and physically demanding jobs, they need insurance to cover their family’s financial health in case one of them suffered a long-term disability or died prematurely.

Wayne’s tax advisor had suggested that he buy a $500,000 life insurance policy, but Bolton said $150,000 to $200,000 on both their lives would be more prudent.

Bolton said it would be hard to find disability insurance at a reasonable price. He advised the Skinners to talk to their insurance agent and to get an estimate of how much Social Security’s disability insurance would pay them. They can get that estimate by filling out a form called an earnings and benefit statement.

Kathy M. Kristof can be reached at kathy.kristof@latimes.com. 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: Wayne, 33, and Mona Skinner, 30

* Gross annual income: About $50,000

* Goals: Bigger house, secure retirement, a college fund for the kids.

Current Portfolio

* Cash: $9,000 in savings account earning 1% interest

* Wayne’s 401(k): About $28,100, divided among Schwab S&P; 500 (30%), Safeco Equity (18%), Warburg Pincus fixed-income (18%); Janus Worldwide (14%), Baron Asset Fund (small-company stock fund) (10.6%) and Schwab Institutional Advantage Money Market (9%).

* Mona’s IRA: About $7,800 in Investment Co. of America.

* House: Two-bedroom bungalow with a detached guest house that’s rented out for $500 monthly. The property is worth between $135,000 and $150,000, with a $73,000 mortgage.

* Debt: $18,000 car loan, $700 on credit cards.

Recommendations

* Eliminate 401(k) money market fund and reduce exposure to international stocks.

* Concentrate on splitting their current lot in two to create a housing arrangement for Mona’s parents.

* Create larger emergency fund when they buy new house.

* Buy life and disability insurance.

* When they have additional cash after these goals are met, they should consider putting just $25 a month or so into college savings.

Meet the Planner

Percy E. Bolton is founder of Percy E. Bolton Associates Inc. in Pasadena, an independent advisory firm providing comprehensive investment management consulting services to a wide range of clients. He was named as one of the nation’s top financial advisors by Worth magazine for four consecutive years, from 1996 to 1999.