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Taking It Slowly

Risk-Averse Couple Have Early Retirement in Mind

June 02, 1998|STEPHANIE LOSEE | SPECIAL TO THE TIMES

Paula and Ronald Rembert have one child, two jobs and an ambitious goal: to have two children and no jobs.

That is, Paula, 33, and Ronald, 41, dream of having a second child (son Patrick is 9) and retiring in 13 years, when Ronald hits the 23-year mark in his job as a mechanic with the Metropolitan Transit Authority and becomes eligible for a pension.

The couple were aware that making their dreams come true would require some serious saving and investing, but they, like a lot of two-career parents, had plenty of other things to deal with every day, and thinking about far-off goals never became a priority.

As of about a year ago, the couple had managed to put aside just $19,800--$10,000 in Ron's workplace retirement savings, $7,300 in savings accounts and a CD and $2,500 in a mutual fund. Worse, they owed $4,900 on four credit cards.

Ronald, a mechanic with the MTA, and Paula, a health-care associate now working for the Ernst & Young accounting firm, realized they had better start saving more of their income, now about $95,000 a year gross.

Ronald began diverting $200 a month into a deferred compensation plan at work, adding to the retirement plan he was already participating in and to the $100 a month he was depositing in a savings account. Paula, who is not yet eligible for her firm's 401(k) plan, set up an automatic savings plan for $200 a month to go directly into her Charles Schwab account. Altogether, the couple were now salting away more than $7,200 a year.

It was a step in the right direction, but not quite the big bucks required to make their lofty ambitions a reality.

Then came the windfall. Paula inherited $385,000 in real estate and other investments after her mother died about a year ago. The Remberts now owned a $250,000 home in Long Beach free and clear--no mortgage--and were bequeathed $135,000 in a number of money market accounts, CDs, an IRA and a Treasury bill.

As Paula examined her mother's array of ultraconservative investments, she realized that she herself was investing like a senior citizen.

"Looking at my mother's portfolio, I saw how slowly our money would grow if we didn't change our approach and take more risks," Paula said. "I want to take the money and invest it for a higher return in stock mutual funds."

Ronald, for his part, had been equally risk-averse. "I'm even more conservative than she is," he said. "I like to let money sit for a while, sit back and see what happens."

But there's a wrinkle. Before the couple decided it was time to get more aggressive with their investing, Paula withdrew $20,000 from her mother's $80,000 IRA and bought a CD that she used as collateral for a loan to buy a $20,000 car. Then she parked the $60,000 remaining in the IRA in a 30-month 6% CD that won't mature until the year 2000.

The couple have limited their options by having so much of their assets tied up in long-term CDs, said Karen Altfest, a fee-only financial planner based in New York City. "There's not much to do until then unless they want to break a couple of CDs--and there are good reasons and not-good reasons for doing that."

About 87,500 reasons, in fact. Besides the new $60,000 and $20,000 CDs, there's a $5,000 CD Paula inherited and a $2,500 one the couple had before the inheritance. All are for terms of from two to three years.

The penalties for breaking a CD aren't necessarily so onerous that it's never a good idea--it depends on the investor's circumstances. For a couple with the same income but less averse to risk, Altfest would probably advise breaking the CDs and trying to get better returns elsewhere.

*

But the Remberts are novice investors who would be more comfortable with making changes slowly, in any case, and who would abhor the idea of paying a penalty for anything.

With a high-priced stock market that could turn bearish soon, "it may be just as well to change your allocations slowly," the planner said.

Paula wondered whether she and her husband might take out a mortgage on their house to free up some cash for investing.

"It's an interesting idea," Altfest said. "But to have money in real estate is to diversify, and writing a monthly mortgage check will just make it harder for you to save for your retirement and the kids' education."

Altfest suggested instead that the Remberts consider their home's equity a source of ready cash if they need it later for college costs or to handle an emergency.

That leaves the Remberts' two $20,000 money market funds and $2,500 in the Schwab MarketTrack Growth mutual fund to work with.

*

Altfest advised leaving just $500 in a money market account and selling the large-cap stock-and-bond Schwab fund, which has been a laggard performer.

Altfest selected a diversified mix of no-load funds run by managers she admires; the Remberts can purchase the funds through Schwab to cut down on paperwork. The idea, she said, is for the couple to have their money in U.S. and international funds and to be exposed to the stocks of small, medium-sized and large companies.

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