Their Savings Are Nearly at Peak Efficiency

Disciplined and organized, Tony and Mary Freeman need to tweak their strategy just a bit to move closer to their goals.

By JEANETTE MARANTOS, Special to The Times

    Making it through college wasn't easy for Tony and Mary Freeman.
    Mary Freeman had to work to pay her living expenses and borrow to finance tuition. Tony Freeman had to quit school temporarily to help his parents, whose small Los Angeles garment factory was struggling in 1986. It took him 10 years to get his college degree.
    Those experiences convinced the Freemans that getting through college shouldn't be that hard. But it shouldn't be too easy, either.
    "I don't want our kids to have to struggle like we did," said Tony Freeman, an insurance salesman. "But I do want them to pay for a little bit, like Mary worked in the cafeteria and had student loans. I think it will make them appreciate it more."
    Handling tuition bills and saving for what they hope will be an early retirement are the two biggest financial challenges facing the Freemans. Still, the Ontario couple are on the right track to achieve these goals, said financial planner Nancy Langdon-Jones of Upland. They save nearly 20% of their income, they've built up $9,000 in their emergency fund and they have no credit card debt.
     Since their son, Joseph, was born in November 1999, they've been living on one income--Tony Freeman's monthly take-home pay of about $5,400--and they continued saving even while Tony Freeman spent $7,000 on books and tuition last year working on his MBA.
     Besides their emergency fund, Tony Freeman, 35, and Mary Freeman, 33, have saved about $100,000 in his 401(k), two IRAs and a Charles Schwab mutual fund account. They also own a diverse portfolio of stocks worth about $20,000. By paying an extra $1,000 a month on the $780-a-month mortgage on their Ontario home, they've reduced the payoff on the 30-year note to less than 10 years.
     "You're a wonderful kind of client because you're disciplined and organized and you know your situation," Langdon-Jones told the Freemans. "A lot of people . . . don't have a clue about what they have, let alone what they want."
     But all is not perfect. To achieve their goals, even this disciplined, well-organized couple will have to make some changes--such as freeing up cash by lowering their tax withholding. This year, they're getting a refund of $5,488, an indication that their withholding is too high.
     "That's over $450 a month you could be putting into something else," Langdon-Jones said.
     And it's money that will come in handy for building a tuition fund for Joseph and any future children. Langdon-Jones recommends that the Freemans take advantage of California's IRS Section 529 plan--the Golden State ScholarShare college savings program.
     Section 529 plans are offered by most states and let parents--or anyone else--set up an educational fund for a designated beneficiary. The money grows tax-free until it's withdrawn and then is taxed at the student's rate, which is usually lower than the parents'.
     The plans are flexible. The beneficiary can be changed, as long as the money is used for education. The money can be spent on something not related to education, although the Freemans would have to pay taxes on the earnings, as well as a 10% penalty.
     Savings accumulated in many Section 529 plans can be used at any accredited college or university in the country. Several states allow out-of-state residents to enroll in their plans.
     Langdon-Jones likes California's plan because it can be used at any eligible post-secondary institution in the country--including vocational schools--and covers tuition, books, supplies and up to $2,500 a year for room and board. She also likes the manager of California's fund, TIAA-CREF, one of the country's largest pension managers.
     Other states also have strong managers, such as Fidelity, Langdon-Jones said, so it pays for parents to investigate the different plans. A good comparison is available at http://www.savingforcollege.com. California's ScholarShare program has four options for saving, including a guaranteed return option that's currently paying 6.75%.
     Langdon-Jones recommends calling ScholarShare at 1-800-SAV-4EDU (728-4338) or visiting its Web site at http://www.scholarshare.com to figure out how much to save. For instance, if the Freemans used $5,000 of their tax refund to start a college fund and added $500 a month for 16 years, they'd have about $205,000 saved up by the time Joseph started college, assuming the fund grows by 8% a year.
     The ScholarShare calculator assumes a college inflation rate of 5.3%, so $205,000 would be just about enough to cover four years' tuition at Stanford University, where the tuition is a hefty $22,000 a year, or four years of tuition and other expenses at UCLA, where tuition is $13,400 this year.
     The Freemans like the idea of not covering all the bases for their children. They expect their children to find some kind of part-time work while they're going to school. But Tony Freeman also is mindful of the 10 years it took for him to finish his bachelor's degree--he was first in his family to earn a college degree--while he held down full-time jobs and helped his family after their business closed.
     "I look at going away to school as a rite of passage when you're 18. It's not just the process of getting a degree, but living away from home and being with different people from diverse backgrounds," he said.
     The Freemans' other big goal is to save for a comfortable retirement--preferably to save enough that they can drop out of the work force a few years early.
     Tony Freeman likes his job in insurance sales, but he wants to retire early so he and Mary can pursue their passion for travel. He figures having a master's degree could help him get a part-time teaching job someday to supplement his retirement income.
     "I don't think of retirement as doing nothing," Tony Freeman said. "I think of it as having the freedom to do whatever you want--travel six months out of the year or teach part time. Mary even wants to join the Peace Corps. I just want to have the freedom to do all the fun things we want to do."
     If the Freemans keep saving for retirement at their current rate--putting about $400 a month in Tony Freeman's 401(k) and $500 a month into mutual funds--they'll have $1.3 million by the time Tony Freeman is 60, assuming their investments grow by 8% a year.
     Even this can be improved upon. Langdon-Jones suggested that the Freemans, in addition to adjusting their tax withholding, stop paying the additional $1,000 a month on their mortgage and use that $1,000 instead to pay off the $9,000 loan on their 1999 Honda CRV, their only debt besides their mortgage. Unlike that on the mortgage, the interest on the car loan is not tax deductible.
     After they pay off the car, the Freemans can start putting that money into savings for college and retirement.
     If it makes them feel more secure, the Freemans could pay off their home loan a little more quickly by making one extra mortgage payment every year--$65 a month--and applying it to the principal. That $65 a month would reduce the term of their loan by nearly 6 1/2 years and save them $42,166 in interest payments.
     The Freemans also have neglected one crucial detail--estate planning. Langdon-Jones recommended that the couple hire an attorney to help them draw up a revocable living trust.
     The Freemans' house and brokerage accounts would go into the trust, along with their personal effects, the guardianship instructions for Joseph and their medical directives.
     "You have to do this, because you never know what will happen," Langdon-Jones said.
     Tony and Mary Freeman sheepishly agreed.
     "We've kind of neglected that whole part of our financial life," Tony Freeman said. "It's like, one minute you're married and the next you have a kid. I guess it's time to start thinking about these things."
* * *     Jeanette Marantos 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, 202 W. 1st St., Los Angeles, CA 90012 or to money@latimes.com.
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      * * *

     This Week's Make-Over
     * Subjects: Tony Freeman, 35, and Mary Freeman, 33
     * Annual income: $99,000
     * Goals: Setting aside money for their child's college education and saving for a possible early retirement.
     Current Portfolio
     * Retirement accounts: $73,000 in his 401(k), invested in five T. Rowe Price growth funds; $4,800 in two IRAs invested in Schwab 1000 S&P 500 fund and $25,000 invested in the Vanguard Total Stock Market Index fund.
     * Other assets: About $9,000 in a money market account; about $20,000 worth of stocks and mutual funds.
     * Debt: $9,000 loan on a 1999 Honda CRV and $87,000 owed on their mortgage.
     Recommendations
     * Hire an attorney and spend about $1,000 to set up a revocable living trust.
     * Stop paying an extra $1,000 on the mortgage every month and apply the money to paying off their $9,000 car loan.
     * When car loan is repaid, use the money to save for college and add to retirement savings.
     * Set up a college savings plan through California's ScholarShare Section 529 program.
     * Reduce tax withholding.
     Meet the Planner
     Nancy Langdon-Jones, president of NLJones Inc. of Upland, is a fee-only financial planner and accredited tax advisor.

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