Grad Student Gets Debt, Investment Lesson

For Rhonelle Runner, a wealth of knowledge can be a dangerous thing.

The 31-year-old Los Angeles music librarian is $60,000 in debt because she borrowed money to finance two master’s degrees and, now, to pursue a doctorate in music history at USC. She expects to accumulate an additional $5,000 to $10,000 in debts before she’s through.

Runner is convinced that getting more education will make it easier for her to find a job as a music historian, a field in which advanced degrees are becoming the norm.

“The want ads used to say ‘second master’s degree preferred,’ ” she said. “Now a lot of them say that it’s required. It’s just a matter of time before they require a PhD.”

But the debt and her need to delay getting a full-time job until she completes her education will make it a challenge for Runner to achieve her financial goals, which include financing her retirement and possibly helping her parents when they’re older, said Victoria Collins, an Irvine-based certified financial planner.

Runner will earn between $33,000 and $35,000 this year by juggling two part-time jobs--one at Occidental College in Eagle Rock and another at Pasadena City College. Her schedule, which includes at least 30 hours of work and about eight hours of class each week, is actually cushy by Runner’s standards. Until recently, she had four jobs--the two she holds now plus positions at Cal State Long Beach and UCLA.

“I was in the car driving from one end of the county to the other all the time,” she said.

Once she finishes school, her paycheck won’t grow by much. Starting salaries in her field are in the $40,000 range--not a lot more than what she’s making now working part time.

On the bright side, Runner is frugal. Even while supporting herself and paying for school, she’s put aside about $14,000 in retirement savings and an additional $11,500 for emergencies. She has little short-term debt, and she contributes to both an employer-sponsored 403(b) retirement plan and an individual retirement account. Her 1991 Chevrolet Corsica is paid off, and the rent on her Los Angeles apartment is just $425 a month.

“I commend you for being thrifty and conservative with your expenses,” Collins said. “It appears you are currently saving 11% of your salary. That is excellent.”

Flexibility of Student Loan Repayment a Plus

Collins also was sanguine about Runner’s copious student debts. Although the planner recommended that Runner use some of her short-term savings to pay off one relatively small loan--$2,002 at a 9.48% interest rate--the rest can wait until she graduates in about two years.

Collins noted that the loans have relatively low interest rates and, like most student loans, have fairly flexible repayment terms. When Runner graduates, she’ll be presented with several repayment options, including one that will allow her to stretch repayment over three decades.

There’s little downside to choosing the easiest repayment plan because she can prepay the loans without penalty. Meanwhile, the lower monthly payments give Runner flexibility, Collins said, in case she can’t afford a larger outlay.

Still, Runner will have to do more if she wants a comfortable retirement, especially because there are a lot of “ifs” clouding her financial future, Collins said.

For instance, Runner is an only child and she fears that her parents might eventually need her financial help. Her grandmother was diagnosed with Alzheimer’s disease at age 80 and has been largely taken care of by Runner’s parents, who live in Modesto. Runner isn’t sure whether her parents have saved enough to handle their own potential long-term care needs. If not, she’d feel compelled to help.

Moreover, she’d like to eventually get married, have children and maybe even take some time off work to raise them. But she and her boyfriend of seven years are still in school and haven’t made that commitment. Still, if it happens, the joys and costs of marriage and children could put another wrinkle in her financial plans.

Based on Runner’s current savings patterns, Collins predicts she’d have about $1 million at retirement. However, because of inflation, it’s likely to cost Runner about four times more to live in retirement as it does today. Pulling about $100,000 out of savings each year would deplete Runner’s savings by the time she’s in her mid-70s--more than 10 years short of a woman’s average life span.

Collins projections assume that Runner continues contributing about $7,000 a year to savings, her investments earn 8% on average and inflation averages about 4% per year--all fairly pessimistic assumptions.

The picture improves considerably if any of those variables changes, she said. However, the only variable completely in Runner’s control is how much she saves.

“You want to save as much as you can,” Collins said. “You also need to look at the money you’ve got and see how it’s invested. At this point in your life, you want to invest as aggressively as you can.”

More aggressive investing--putting more of her assets in the stock market and less in fixed-income investments such as bonds--is likely to boost Runner’s long-term investment returns. Runner’s current investment mix is much too conservative for a woman her age, Collins said.

A big chunk of Runner’s savings, $11,500, is in certificates of deposit. This is her emergency fund, so it’s OK to keep it in an easily accessible savings vehicle like a CD.

But Runner also has about one-fourth of her 403(b) retirement savings--more than $1,500--in money market and bond mutual funds, while her $8,000 IRA is in a growth-and-income fund that holds about 15% of its assets in bonds and cash. Fixed-income and growth-and-income funds are generally less volatile than growth stocks and aggressive growth funds, Collins said, but they’re also likely to be less profitable in the long run.

It’s tempting to invest conservatively in bonds and CDs--especially after the stock market’s lousy performance last year, the planner said. But Runner needs the long-term growth that stocks provide to keep her plans on track.

Collins said Runner should redirect the money-market and fixed-income components of her company retirement plan into the growth and aggressive growth funds offered by the plan. It could be a good time to make the shift, given that many stocks are selling at lower prices than they were a year ago.

Increase Savings, Diversify Investments

Over time, she should diversify her retirement assets into various stock market categories, with some of her money invested in large company stocks, some in small and mid-size companies and some in funds that invest overseas, Collins said. She can do that by adding more funds to her IRA as she makes additional contributions, or by selecting mid-cap and international stock funds for her retirement plan at work.

Collins would like to see Runner boost her retirement and non-retirement savings by as much as $10,000 annually. But the planner acknowledged that there isn’t much leeway in her current budget, partly because her schooling is so expensive.

Runner also needs to realize that her plans may need to be revised many times as her life and circumstances change. She should consider seeing a planner again when she’s finished with school or after she marries and has children.

“What you get here is a snapshot,” Collins said. “As you go along and change things in your life, it would change the recommendations. Financial planning is a dynamic thing.”

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, 202 W. 1st St., Los Angeles, CA 90012, or to money@latimes.com.

*

You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform. Recent columns are available at https://www.latimes.com/makeover.

*

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investor: Rhonelle Runner, 31

* Annual income: About $33,000

* Goals: Save for retirement and plan for the possibility that her parents may need financial help.

Current Portfolio

* Cash and savings accounts: $11,500 in certificates of deposit; about $2,300 in checking.

* Retirement accounts: A total of about $14,000 in two defined contribution plans and a Roth IRA. About one-fourth of the retirement money is invested in money-market and fixed-income accounts. The rest is in funds that concentrate on big company stocks.

* Debt: Nearly $60,000 in student loans: $1,422 at 5%; $4,000 at 6.32%; $5,000 at 7.59%; $15,136 at 8%; $32,257 at 8.25%; $2,002 at 9.48%.

Recommendations

* Contribute as much as possible to retirement plans.

* Switch more of retirement investments into stock funds, diversifying gradually into different segments of the stock market, adding mid-cap, technology, value and international funds.

* Use savings of $11,500 to pay off highest-rate student loan--the $2,002 she owes at 9.48% interest. That will still leave her with more than $9,000 in emergency savings.

* Revisit financial planner in a few years when she’s done with school and her life is more settled.

Meet the Planner

Victoria Collins is a certified financial planner with Keller Group Investment Management Inc., a registered investment advisory firm in Irvine. She has written five financial books, including “Invest Beyond.Com” (Dearborn Press, 2000).