With Future Uncertain, They Need a Better Return on Funds
Newlyweds Mike and Kim Logie are learning there’s nothing like being caught up in a corporate restructuring to throw a family’s financial plans into doubt.
Kim, 33, earns about $39,000 a year selling books for a publishing company that also provides her with a car, good benefits and a big year-end bonus--$20,000 in 2000.
But her company was recently bought out by another firm, and Kim worries she’ll be among the layoffs expected later in the year. With Mike, 31, just out of school and not starting his new job until July, losing Kim’s income would be a major blow to the couple’s plan of saving for retirement, buying a bigger house and having children.
“We need some direction,” Kim said. “We don’t want to put too much away for retirement and not have enough for now.”
Fortunately, the Logies seem disciplined enough to achieve their goals, said Fountain Valley financial planner Ann Egan. But they need to be clear about what they want and when they want it to happen, she said.
“Don’t spread yourselves too thin,” Egan said. “There is enough uncertainty in your lives for the next few years, so you need to focus your goals and make them as precise as possible.”
The couple learned frugality the hard way--through experience. Mike’s parents divorced when he was 3, and his mother raised him and her four other children alone. Mike was 10 when he got his first job cleaning construction sites.
“My mom was very adept at making ends meet, so we had all the basics, but if we wanted bicycles or the kind of leisure things upper-middle-class families funded, we had to purchase it on our own,” Mike said.
Mike quit school at 16 to work full time in construction and joined the Navy when he was 19. While in the Navy, he got his GED and an associate of arts degree, and then started saving $1,200 a month--about half his Navy pay--so he could get a degree in accounting.
Mike met Kim in 1996 and was able to work his Navy job as an underwater construction diver and go to college full time while he was on shore leave. He left active duty in December but plans to spend eight years in the Navy Reserve so he’ll be eligible for a Navy pension of about $1,200 a month when he retires.
When the two met, Kim already had learned some hard lessons about handling money. She financed college mostly with her credit card. By the time she got her bachelor of arts degree, she owed about $7,000, accumulated with the help of a former boyfriend. Little wonder, then, that Mike’s money management skills impressed her.
“He’d saved $30,000, and I’d never met anybody who had that much money in the bank,” Kim said. “He’d take every receipt he had and pin it up on a bulletin board, and he never carried a balance on his credit card.
“When he told me he wouldn’t marry me if I still had debt, I was really embarrassed, mortified really, because I had no intention of having him pay off my debt.”
Kim used her bonus last year to pay off her credit card--before the wedding--as well as the $5,000 she borrowed from her 401(k) to buy a townhouse in Oxnard.
Today the Logies’ only debt is a $318 monthly payment on Mike’s 1998 Dodge Ram pickup and a $920-a-month mortgage on the townhouse. Kim puts in an extra $80 a month--the equivalent of one extra payment a year--to pay off the 30-year mortgage sooner.
They like to travel--to the East Coast at Christmas and a few weeks in Europe this summer--but their day-to-day entertainment is pretty simple, such as playing at the beach with their dogs Mak and Miya.
The Logies essentially have been living on one income since December--although Mike has completed his accounting degree, he won’t start his $30,000-a-year job as an auditor for Ventura County until July. Egan said the best way for them to prepare for their uncertain future is to continue living on one income, even after Mike starts his job.
“I tell everyone who wants to start a family: ‘Start living on a single income way in advance,’ ” Egan said. “If you can do that you’re way ahead of the game, because once you get accustomed to living on two salaries, it’s very hard to go back.”
The couple’s monthly expenses are about $2,900, less than the $3,050 they take home each month after Kim puts $430 into her 401(k) and $100 into her passbook savings. And between them, the Logies have saved more than $90,000--including $45,000 in Kim’s 401(k), $8,000 in two Roth IRAs and $38,000 in passbook savings and certificates of deposit.
Not a bad start, Egan said, but if the Logies want to retire at 60, buy a bigger house and have children without straining their household budget, they need to earn a better return on their savings.
This year, the couple put $4,000 into Roth IRAs at Fidelity and were unprepared when Fidelity asked how they wanted the money invested. “We said, ‘Huh?’ ” Kim said. “It was just too big a decision, so we left it in a money market fund for now.”
“You have to increase your rate of return,” Egan said. “Right now you’re mostly in passbook savings, earning 1.5%.” Even annual yields on money market funds have fallen below 4% recently.
The Logies must learn to accept bigger risks in order to reap bigger rewards, she said. And that means investing in the stock market.
“I know the market’s instability right now is terrifying, but it’s also normal,” Egan said. “For your long-term money, the market risk shouldn’t bother you too much.”
Egan recommends the Logies put three to six months’ worth of expenses, about $6,000 to $12,000, in a money market fund for emergencies.
For the rest of their savings, she said, the Logies should hire a fee-only financial planner to help them choose good growth-and-income stock mutual funds. Growth-and-income funds are less risky than pure growth funds but still provide a way to tap into the stock market’s long-term potential. The planner will help them overcome their fear of the stock market, Egan said.
What about that corporate restructuring? If Kim does lose her job, the Logies will face lean times trying to keep up their savings rate on Mike’s auditor salary and $280-a-month Navy Reserve income.
But they have an ace in the hole. Kim has a master’s degree in clinical psychology and has been slowly working on her supervised training so she can get her license as a marriage-family therapist. She earns $300 a month working weekends and evenings, trying to build up 3,000 hours of training for her license. If she loses her job, she probably could increase her hours and get her license sooner.
After talking to Egan, the Logies decided they’ll take a year or two to build their savings and clarify their financial situation before they take any other life-changing steps.
“We’re good with goals,” Kim said. “Once we figure out what we need to do, we can get it done.”
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Jeanette Marantos is a regular contributor to The Times.
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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
Subjects: Kim Logie, 33, and Mike Logie, 31
Annual income: About $46,000
Goal: Riding out an uncertain financial future while planning for a baby, a new house and secure retirement
Special circumstances: Mike is about to start a job earning $30,000; Kim could lose her job earning $39,000, plus bonus--$20,000 last year.
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Current Portfolio
Retirement accounts: $45,000 in Kim’s 401(k), invested in three Fidelity stock mutual funds; $8,000 in two Roth IRAs, invested in Fidelity money market accounts
Other savings: About $33,000 in passbook savings accounts, earning about 1.5% interest; about $5,000 in six-month CDs, earning about 5% interest
Other assets: A townhouse worth about $200,000 in Oxnard
Debt: $109,000 on the townhouse mortgage; $9,400 loan on a 1998 Dodge Ram pickup
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Recommendations
* Live on one income even after Mike starts his job in July and put the rest in savings until Kim’s job status is clear.
* Move three to six months’ expenses ($6,000 to $12,000) into a money market account paying higher interest than their present passbook savings.
* Work with a fee-only financial planner to put together a portfolio of growth and income mutual funds to get higher long-term returns.
* Increase retirement savings from $500 to $800 a month to achieve their retirement goal.
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Meet the Planner
Ann Egan is a certified financial planner and investment advisor with Vision Capital Advisors in Fountain Valley.
