A Few Universal Truths

Financial planning involves three basic steps: knowing where you stand, determining where you want to go and figuring out how to get there.

That journey was the subject of The Times’ Money Make-Over, a series that highlighted the financial problems of Californians in all stages of life.

The make-over advice these people received was as individual as their situations. But a few universal truths emerged. They learned that avoiding debt and starting to invest as early as possible can get them to their goals more quickly. They also learned that financial mistakes are common and don’t have to keep them from getting what they want.

Here are the stories of four make-over subjects, and the lessons they learned:

Starting Out in Debt

At first, Eileen Zyko dreamed of being an actress. Then she wanted to be a producer. Two years after moving to Hollywood, Zyko landed a job as an executive assistant to the president of Virgin Records America, where she earns $35,000 a year.

Meanwhile, she had racked up $64,000 in debt, including $16,000 on high-interest credit cards and $38,000 in student loans.

Kathleen Stepp, a fee-only certified financial planner based in Overland Park, Kan., advised Zyko to set two overriding priorities: paying down the debt and figuring out what she wants to do with her life.

At $350 a month, it would take Zyko, 26, seven years to pay off her credit card debt, assuming a 15% interest rate. If she could raise the payment by $150 per month, to $500, Zyko could be rid of the credit card debt in four years. The student loans can wait, with Zyko paying the minimum required until her higher-rate consumer debt is paid off.

Other financial goals, including saving for retirement, should take a back seat at least until the credit card debt is gone, Stepp said.

To really get ahead, however, Zyko needed to look at her career and the best way to advance to a better job--and better pay. Her current job wasn’t moving her toward the goal of being a producer, but Zyko found she really liked the work and the environment.

With the help of Toni Bernay, a Beverly Hills clinical psychologist and executive coach, Zyko discovered a new long-term career goal that combines her past ambitions and present experience: film or TV music supervisor.

“I love music; I always have,� Zyko said. “It’s something I could be good at.�

Making a Nest

Michael and Anita Meagher have largely conquered their consumer debt, whittling $40,000 in credit card bills and loans down to $5,000. But now they worry that the one-bedroom guest house they rent in Ventura won’t be large enough when their baby arrives. They wanted to buy a two-bedroom home as soon as they could, with the idea of relocating to a more rural wine region in a few years.

But Delia Fernandez, a fee-only certified financial planner in Los Alamitos, urged them to stay put--at least for now.

The Meaghers are getting by on Michael’s $48,000 salary as a winemaker because Anita, 36, has been ordered to spend her entire pregnancy on bed rest. Babies and new homes are expensive, and the Meaghers’ desire to move within a few years makes a home purchase now a risky proposition, Fernandez said. “You can’t predict the real estate market for such a short period, and you could find yourself tied to a house you no longer want to live in due to a slow market,� Fernandez told the couple. “Renting will give you the freedom to build for a down payment.�

Fernandez urged them to keep their expenses as low as possible and build their retirement funds, which could be tapped for a home down payment. The Meaghers can take up to $10,000 from an IRA, for example, for a first-time home purchase without paying early-withdrawal penalties.

Fernandez suggested that Michael, 33, invest the maximum $2,000 a year in his own IRA, which is tax deductible because he does not have a retirement plan at work. Because the money will be needed within a few years, the planner recommended that it go to a low-risk bond fund, such as Vanguard Short-Term Bond Index (three-year average annual return: 6.3%). More aggressive investing can wait until after their home is purchased.

Saving for Retirement

Michael Haschka and Michelle Villanueva had to douse their dreams of early retirement with a bucket of financial reality.

The couple, 39 and 28, want to quit work in 20 years. But they got a slow start in retirement saving, with just $18,000 set aside so far. Replacing their $85,000-a-year income in retirement would require them to put aside a whopping $3,000 a month, starting immediately, said Eric Bruck, a fee-only certified financial planner in Culver City.

That doesn’t mean it’s hopeless, but their situation does require making some choices. The couple can work longer, live on less in retirement, boost their current income--or some combination of all three. And they need to make a clear plan for getting where they want to go.

Bruck recommended that Haschka, a self-employed computer consultant, first map out a business plan, with a strategy for growing the business and projecting how much income he expects to earn. Without such a plan, he and Villanueva, who works for Liberty Insurance Group as a specialist in preventing workplace injuries, can’t make realistic savings plans or follow any kind of comprehensive financial strategy.

To supplement the $828 Villanueva saves each month in her company’s 401(k) plan, Bruck recommended that Haschka set up a formal retirement plan for himself, either a simplified employee pension individual retirement account (commonly known as a SEP-IRA) or a Keogh plan. Either of these plans for self-employed people would allow Haschka to put away a portion of his pretax income for retirement, and the returns on investments in either plan accumulate tax-deferred until retirement.

Bruck estimated that Haschka could be saving at least $15,000 annually through a Keogh account within the next few years, and ultimately as much as 25% of his self-employment income, or $30,000 per year--the maximum allowable contribution for a Keogh. Savings like that would get the couple much closer to their retirement goals.

Tapping the Nest Egg

Pasadena resident Marie Tashima started buying stocks in her 20s. Now that she’s 70, her early start and continued investing have rewarded her with a net worth of close to $1 million. Her task now: figuring out how best to spend it.

Tax laws require Tashima to start taking distributions by next year from her IRA, which is worth $300,000. Minimum distributions from IRAs must start by April 1 of the year following the year in which an investor turns 70 1/2 and continue annually after that until the IRA is exhausted or the account holder dies.

Tashima wants to take out enough money to enjoy her retirement, but she also wants to leave money after she dies for charitable causes and her relatives. Balancing those goals, and minimizing the taxes paid by herself, her estate and her heirs, requires a comprehensive financial plan, said Karen Goodfriend, a certified public accountant and personal financial specialist. The options facing retirees, and the potential financial consequences, are so varied that there are no rules of thumb.

As a single woman, Tashima does not have the favorable tax options available to married couples with IRAs. A surviving spouse could roll over the money into an IRA in his own name, stretching out the time in which distributions had to be made and increasing the time the remaining money could grow tax-deferred.

Goodfriend recommended that Tashima name a charity as the beneficiary of her IRA and bequeath the rest of her estate--mostly stocks that combined are worth more than $600,000--to her relatives. Naming a charity rather than a relative means Tashima would have to take larger distributions from the IRA during her lifetime because she would be using only her own life expectancy, rather than a longer, joint life expectancy, to determine the distribution amounts. But the plan would reduce the overall tax bite on her heirs, because stocks and other investments held outside of IRAs get favorable tax treatment at death.

Goodfriend also suggested that Tashima ease back on her passion for stocks, which accounted for 90% of her portfolio. A stock market plunge could cut deeply into Tashima’s wealth, but she had been reluctant to sell her stocks because of the taxes she would have to pay on the capital gains.

Goodfriend offered a solution. If Tashima reallocated most of her IRA stocks to bonds, the transactions inside the IRA would not be subject to tax; Tashima would simply pay regular income tax on the withdrawals as she made them.

Overall, Goodfriend said, Tashima should be pleased with her financial situation. Tashima’s healthy nest egg shows what can happen when investors start early, avoid debt and make good financial choices, Goodfriend said.

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Meet the Planners

Eric Bruck is a fee-only certified financial planner and principal of Bruck & Caine Advisory Inc. in Culver City . He has been a registered investment advisor since 1984.

Delia Fernandez is a fee-only certified financial planner at Fernandez Financial Advisory in Los Alamitos. She serves as an instructor and member of the advisory committee for UC Irvine Extension’s Personal Financial Planning Certificate Program.

Karen R. Goodfriend is a certified public accountant and personal financial specialist with Palo Alto-based Moorman & Co. She specializes in tax planning, portfolio diversification and retirement planning. She has been named one of Worth magazine’s Best Financial Advisors.

Kathleen Stepp, a fee-only certified financial planner, is the president and founder of Stepp & Rothwell Inc., based in Overland Park, Kan. She advises individuals in all phases of personal finance planning and serves as vice president of education for the national board of the National Assn. of Personal Financial Advisors.