With Planning, Wanting It All Can Be Realistic

Neal and Cyndie DeVries, both 24, want a new car, a new house, children, a vacation home and a comfortable retirement at age 50 traveling the country in a recreational vehicle.

Although wanting it all sometimes reflects simply wishful thinking or youthful ambition, the DeVrieses’ financial goals seem realistic considering what they’ve accomplished so far.

The couple already own a car free and clear and purchased a townhouse in Fountain Valley. Cyndie operates her own graphic arts business, DeVries DeSigns. Neal’s job as a computer software engineer for TRW Corp. has enabled him to rapidly accumulate retirement savings, which now exceed $15,000. Except for mortgage loans amounting to $145,000, they are debt-free.

Saving money comes easily to the DeVrieses. For starters, they’re in the habit of giving 10% of their gross income to their church. “We want to live a little below our means and put money away,� Neal said. “A lot of what we do is follow biblical principles: to tithe, not be in debt, not be extravagant.� About the only luxury that they imagine for themselves is a small, rustic vacation home.

The DeVrieses’ combined gross annual income of about $80,000 is ample for their lifestyle. They dress casually. Their idea of a good time is fishing, walking their dog or volunteering at church. They joke about their modest neighborhood, which borders an industrial park. Neal drives a used 1991 Ford pickup. Cyndie is borrowing her father’s pickup until she finds a suitable used sedan, for which she will pay cash.

Supportive parents, whom the DeVrieses regard as role models of prudent spending and saving, have helped the couple get a head start on financial planning. Neal’s parents lent them $24,000 to apply toward a down payment on the townhouse that they purchased two years ago. They’ve already cut that loan balance to $15,000.

Although they had some help from their parents, the DeVrieses, both graduates of John Brown University, a private Christian college in Siloam Springs, Ark., are largely responsible for their own good fortune. Scholarships financed all of Neal’s higher education and paid for part of Cyndie’s. Neal’s skills as a designer of computer software and his two bachelor’s degrees--one in computer systems and another in electrical engineering--landed him a good job in a growing industry.

Richard Kagawa, a certified financial planner in Huntington Beach who reviewed the DeVrieses’ finances at The Times’ request, said that although the couple’s parents did not give a great deal of financial support, they provided an invaluable lesson.

“The DeVries’ parents were good role models, and living by example means everything to children. No matter how much or how little money you have, by being frugal, adhering to the Puritan work ethic and giving to charity, you’re showing your children how to live. It’s the whole thing about teaching people how to fish versus giving them fish,� Kagawa said. “My parents gave me more than what the DeVries got from their parents, and the DeVries are way ahead of where I was at age 24. At age 24, I was a pauper.� Describing themselves as “aggressive beginners� in investing, the couple’s main goal is to absorb the future expenses of a family and still retire early.

“I’m a beginner because I have no idea of what I’m doing,� Neal said. “I’m aggressive because I don’t need the money right now, so I can afford to take losses with gains.� Cyndie echoed that willingness to assume risk, saying, “We’re not interested in safety right now because we have time.� Neither of them expects to receive Social Security benefits because they believe that the system will be either nonexistent or drastically reduced when they retire.

Kagawa said the DeVrieses’ restraint in staying out of debt and their discipline in saving money during the five years of their marriage can be a ticket to most anything they want--including a cabin in the mountains.

“The neat thing about the DeVries is they don’t care what kind of car they drive,� Kagawa said, praising them for their practical car-buying strategy of choosing used vehicles and paying cash. “They’re a very together young couple. I wish more of my clients were like the DeVries.�

Saving while keeping a modest lifestyle is always the best course, Kagawa said, but projecting specific future retirement income for people in their early 20s is mere speculation. “The distance between them and where they’re going is so far, and there are going to be a lot of bumps in the road,� Kagawa cautioned. “These 24-year-olds with no kids are going to become 28-year-olds or 32-year-olds with two or three kids. That’s going to change their cash flow. That’s going to affect their ability to save. So financial planning is a dynamic, moving target.�

TRW is paying for Neal’s graduate studies at Cal State Long Beach, where he expects to get a master’s degree in computer science in 2001. That is likely to lead to higher pay, promotions, job offers and opportunities to start his own business, Kagawa predicted. “As I see it, Neal is in the catbird seat. With his expertise in electrical engineering and computer software, he’ll have people at his feet.�

For now, Neal is content to work for TRW, which allows him to set his own hours and provides 401(k) savings, insurance coverage and other employee benefits. In contrast, Cyndie left the corporate world in June to become her own boss. “I quit my job because I like being more flexible,� Cyndie said. “I like going on vacation when I want to. I can work all night and sleep all day, and nobody cares.�

Given the DeVrieses’ intention to retire early, Kagawa suggested that Cyndie consider establishing a simplified employee pension-individual retirement account, or SEP-IRA, when she is eligible. A SEP-IRA would allow her to squirrel away 15% of her earnings.

Kagawa recommended that Neal try to maximize his 401(k) contribution to 15% of his pretax salary from 10%. He identified as much as $20,000 of discretionary income a year, which gives the DeVrieses some wiggle room to accommodate multiple goals, which include having two children and buying a four-bedroom home. That money could be invested in an account outside the couple’s tax-deferred retirement plans until needed.

Although the DeVrieses are to be commended for saving at such a young age, they should pay more attention to details.

Kagawa noticed that the DeVrieses’ Oppenheimer Main Street Growth & Income Fund Class B is slightly under-performing the Standard & Poor’s 500 index and similar funds in its category, called “large blend,� although it boasts a four-star rating from Morningstar. What’s more, the fund has a declining rear load, or commission, over the next five years. (The charge starts at 5%.) The DeVrieses were unaware of how such deferred-load funds work.

“It’s a highly loaded fund,� Kagawa said. “It’s not my favorite way to buy mutual funds, but it’s better than not doing anything at all.�

He recommended that Neal switch the portion of his 401(k) that is invested in a bond fund, the Putnam Income Fund, to a stock fund to boost his potential returns. Kagawa approved of his other 401(k) investments in several stock funds: PBHG Emerging Growth, Putnam S&P; 500 Index and Putnam Small Company Equity Portfolio.

The DeVrieses also have an IRA, which is invested in National Covenant Properties, which loans money to church construction projects. Although the return is low, Kagawa considers it their commitment to social investing.

The DeVrieses envision spending their senior years traveling the country in a recreational vehicle, working at church youth camps, doing more volunteer work and pursuing their hobbies. Neal summed up the other reason he wants to retire at age 50 in one word: “Golf!�

Kagawa said the DeVrieses’ goal of retiring in 26 years would be easily achievable if they do not have children and their financial situation remains about the same. But a family could change the dynamics. “The cost of having children is incredibly high. If they have children, which is one of their goals, they’ll probably work longer,� Kagawa predicted. On the other hand, because Neal’s income potential is high, they do have a fair shot at reaching their goals.

*

Suzy Hagstrom is a regular contributor to The Times. 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 [email protected]. You can save a step and print or download the questionnaire at http://ukobiw.net./makeoverform.

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

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This Week’s Make-Over

* Investors: Neal DeVries, 24, a computer software engineer, and Cyndie DeVries, 24, a freelance graphic designer

* Combined gross annual income: About $80,000

* Goals: Buy a new car, a new house, a vacation home, have children. Retire at age 50.

Current Portfolio

* Cash: About $3,500 in checking and money-market accounts.

* Debt: Mortgage of $130,000 and a $15,000 balance on a $24,000 loan toward home’s down payment.

* Investments: $5,000 in Oppenheimer Main Street Growth & Income Fund Class B

* Retirement accounts: About $16,000.

Recommendations

* Establish an emergency cash reserve of about $20,000.

* Switch Neal’s bond mutual fund in the 401(k) to a stock mutual fund.

* Use the stock mutual fund as an “accumulation fund� for children, a new house and/or vacation home.

* Increase Neal’s 401(k) contribution to the maximum 15%.

* Boost Neal’s disability insurance so that it would pay 60% of his salary. That change would require Neal to pay an annual premium of $119. His employer currently provides him free disability insurance that would pay 40% of his salary.

Meet the Planner

Richard Kagawa is a fee-based certified financial planner, chartered life underwriter and president of Capital Resources & Insurance Inc. in Huntington Beach. Kagawa is a member of the Orange County Society of the Institute of Certified Financial Planners.