Wanted: It All

By HELAINE OLEN

May 13, 1997 12 AM PT

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Brooke Lawrence and Michael Reed have lots of plans for their money. At the moment, however, their checklist, which includes everything from a healthy retirement nest egg to a new kitchen sink, remains more of a wish list.

“Obviously, we are going to have to win the lottery or practice delayed gratification,” Lawrence said with a laugh.

Delayed gratification is difficult for this kinetic couple. Lawrence, 34, and Reed, 28, met and fell in love last year while biking in the California AIDS Ride. Within months, they had purchased a $216,000 Sherman Oaks home together and began planning for a summer 1999 wedding.

They quickly began making other plans too. Lawrence and Reed want to renovate their house, buy new bikes and make monthlong jaunts to visit Lawrence’s sister in Saudi Arabia and Reed’s family in Australia.

Reed, a scientist in a postdoctoral research position who has lived in the U.S. for a relatively short time, is still a little perplexed by what he considers a peculiarly American preoccupation with money.

“Money is much more important here,” he says. “In Australia, as long as you’re getting by and have your mates, it’s all fine.”

Be that as it may, Reed and his mate--a freelance TV commercial production manager whose income can vary--are determined to increase what they’re putting aside for retirement because they are keenly aware that they need to begin investing now if they expect to maintain their current lifestyle in retirement.

Carol Akright, a certified financial planner with offices in Los Angeles and Albuquerque, says the most important decision Lawrence and Reed need to make is to set priorities for their many goals.

“You can do all the things you want to do, but the important thing is when you do them,” the planner told them.

Simply put, the couple’s wants outstrip their income and assets. Lawrence earns between $80,000 and $90,000 a year; Reed brings in $30,000.

Lawrence’s assets include $10,469 in an individual retirement account invested in Fidelity’s Contrafund growth-stock mutual fund (five-year average annual return: 17.7%), and $2,100 in another IRA in a bank money market account. She has $3,700 earmarked for travel and emergencies in a Schwab One money market account and about $2,000 in two individual stocks.

Lawrence has followed a somewhat eclectic approach to individual stocks, with decidedly mixed results. She purchased 60 shares of long-distance phone company Worldcom Inc. at $8.125 in 1994; the stock is now trading at about $26. She bought 100 shares of Koo Koo Roo Inc. at $8.56 after enjoying some of the restaurant chain’s chicken, but that stock is now trading at about $4.

Reed has only a few hundred dollars in his savings and checking accounts. There is $550 in his 403(b) retirement plan, which is invested in a money market account.

Their monthly mortgage bill of $1,779 is a steep increase from what they had been paying in rent, and they usually add an extra $50 a month in an effort to pay down the principal on their loan faster.

Since purchasing their home, in which they have virtually no equity, they’ve cut back on everything from dinners out to private sessions at the gym with a personal trainer.

The couple know they are in a bind and that they will have to do something about it sooner or later.

“We’re spending a lot of money for kind of a boring lifestyle,” Lawrence admits.

Akright’s assessment of the situation? The couple need to think hard about how they are spending and saving if they expect anything to change. A look at the numbers proves the planner’s point. The couple are spending a little more than $6,100 a month and saving $1,125. After taxes--which include self-employment taxes such as the Social Security and state disability Lawrence must pay--”it’s likely a wash between after-tax income and total expenses,” Akright says.

The couple may find they’ll have more leeway in a year or so. Reed’s postdoctoral position will terminate in the summer of 1998. He hopes to get a job with a biotechnology firm in a position that would pay $50,000 to $60,000 a year.

But Akright urged the couple to think about their situation as it is today and to choose among three courses of action:

* They can make an immediate sharp reduction in their living expenses, saving more of their money so they can reach all their goals eventually.

* They can stop saving for retirement until Reed’s income increases. That will make a difference to their retirement savings in the long run, but, because they are relatively young, if they resume saving as soon as possible, they should be all right.

* They can permanently scale back on their more ambitious plans, such as remodeling their home extensively and traveling frequently.

Akright favors a strategy combining the first and last options. It’s simply unwise not to save for retirement if you possibly can.

Akright agreed with the couple’s paying extra on their mortgage--that course will save them money in the long run. She said the couple should attempt to save a few hundred dollars more a month in slow, incremental steps.

Akright was careful to add that she did not want to sentence the couple to a regimen of penuriousness. She urged Lawrence and Reed to continue making travel plans, but to make compromises such as shorter trips.

The planner recommended that the couple divvy up their savings differently. Two-thirds of what they save should be earmarked for placement in tax-deferred retirement accounts. That way, the couple will reap significant savings when Uncle Sam makes his annual house call.

Lawrence, as a freelancer, should consider setting up a Simplified Employee Pension Plan, also known as a SEP-IRA, or a Keogh account, which is a similarly tax-deferred retirement plan for self-employed individuals. With a SEP-IRA or Keogh, Lawrence could place into it as much as 15% of her annual gross pretax income or $30,000 a year, whichever is less.

In regard to the specific investments the couple already have, Akright suggested that Lawrence immediately move the cash in her money market IRA to a stock mutual fund such as Fidelity Growth & Income (five-year average annual return: 18%) or T. Rowe Price Growth and Income (16.6%), where the money would be expected to generate substantially higher rates of return over the long run.

Reed’s first step, Akright said, should be to immediately begin contributing the maximum allowed to his workplace retirement plan and to have all that money invested in stocks.

Lawrence needs to begin diversifying her investments. Akright recommends that she add a few different kinds of mutual funds to her portfolio over time.

Ideally, the planner said, Lawrence’s portfolio would have 40% of its holdings in a mixture of large-stock funds. A mix would provide diversity in this area because, within the large-stock fund universe, different types of funds have different styles and objectives--such as “growth” and “value.”

Some of her suggestions: the newer T. Rowe Price Blue Chip Growth fund and Oppenheimer Quest Opportunity Value A (five-year average annual return: 17.9%).

Twenty percent of Lawrence’s portfolio should be in a mid-size-stock fund such as the newer Putnam Capital Appreciation, 20% in a domestic small-stock fund such as T. Rowe Price Small-Cap Value (five-year average annual return: 16.8%), and 10% in international stock funds such as the newer Scudder Emerging Markets Growth and Putnam Europe Growth A (five-year average return: 15.7%). The rest would be in a bond fund.

A number of these funds--such as Putnam and Oppenheimer--are “load” funds, which means they charge an upfront sales commission to buyers.

Akright contends that such one-time charges should not scare off potential investors, particularly if they are investing for the long haul. She argues that some of these funds offer investors lower expense ratios (expenses include the fees charged annually for managing the investments and administration of the fund) than some no-load funds.

And of course, the long-term return on a fund will depends less on whether a load is paid than on the quality of the fund’s management.

(It should be noted that planners who earn commissions on sales of products such as annuities and load mutual funds, as Akright does, stand to profit if their clients opt to buy those products. That is one of many factors to be weighed when choosing a planner and deciding whether to follow his or her advice.)

As for individual stocks, Akright suggests that Lawrence forget about them. For someone in her economic position and who knows little about investing, individual stock purchases are just too risky, the planner said.

Whatever specific strategy the couple decide to pursue, Akright urged them to draw up a partnership agreement laying out clearly who would get what in the event of a breakup. It may not be romantic, but it’s wise.

“It’s not that you’re anticipating any kind of breakup,” the planner says, but that “if you are unmarried and if there is a dispute or the relationship ends, it can cost a lot of money to decide who gets what without a preexisting agreement.”

Los Angeles-based freelance writer Helaine Olen is a regular contributor to The Times. She can be reached on the Internet at [email protected]

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investors: Brooke Lawrence and Michael Reed

* Ages: 34 and 28

* Occupations: Lawrence is a freelance TV commercial production manager; Reed is a research scientist.

* Gross annual income: Lawrence’s income varies, but she expects to gross more than $80,000 in 1997. Reed earns $30,000 annually.

* Financial goals: Learn more about investing and gain more control of day-to-day expenses. Set priorities among their numerous financial goals, which include saving for retirement, travel and improvements to their home.

Current Portfolio

* Lawrence has an individual retirement account valued at $10,469 in the Fidelity Contrafund and $2,100 in a bank money market account IRA. She keeps $3,700 in a Schwab One money market account. In addition, she owns 100 shares of Koo Koo Roo, currently valued at about $400, and 60 shares of Worldcom, worth about $1,560. She also keeps more than $2,000 in her personal and business savings and checking accounts.

* Reed has $300 in his checking account and $550 in his employer-sponsored tax-deferred retirement plan.

* The couple recently purchased a Sherman Oaks home for $216,000 that is held in joint tenancy. They have little equity in the residence.

Recommendations

* Boost savings by $200 to $400 per month. Start putting two-thirds of retirement savings into tax-deferred accounts. Continue paying more than required on mortgage in effort to save money in the long run.

* Lawrence should move her funds in bank money market account IRA to a stock mutual fund. She should shun individual stocks in favor of mutual funds.

* Lawrence and Reed should draw up a partnership agreement.