Deejay Needs to Turn Up Volume

For a guy who’s got thousands of dollars in CDs, Chase needs a lot of help with his finances.

Actually, Chase’s CD collection is of the musical variety, grist for his 7 p.m.-to-midnight radio show on KLYY-FM, the Pasadena-based rock station better known as Y107.

Chase, who goes only by his first name, keeps his $8,000 in savings parked in a low-interest-earning bank account. His retirement fund, such as it is, is the $450 he’s got in an IRA, also in a low-return investment. Furthermore, he can’t seem to eliminate a pesky $2,000 credit card debt, the result of a few too many dinners on the town and the occasional trip to his native England.

“My knowledge of the stock market is nothing,” Chase admitted. “My experience is limited to tax time and H&R; Block. Music is my religion. I love the music.”

That’s not to say Chase is naive enough to be harboring some vague when-I’m-64-style notion that a carefree retirement will somehow just arrive. He’s aware he needs to improve his knowledge of personal finance matters, and, upon receiving word not long ago that he’d be getting a $10,000 inheritance soon, he decided to seek professional advice.

That money means a lot to someone like Chase. Sure, the Howard Sterns with their multimillion-dollar syndication deals or the Marks and Brians in drive-time slots at well-established stations covering a major market such as Los Angeles are pretty well fixed. But the story is very different for most radio disc jockeys. Besides the insecurity of being in a ratings-dependent line of work, these announcers earn far less than the medium’s stars.

“It’s very possible for a deejay at a ‘guerrilla’ station not covering the entire market to earn between $40,000 to $60,000 in Los Angeles,” said Jeff Pollack, chairman of the Pollack Group, a Los Angeles-based radio consulting firm. “These so-called guerrilla stations need to run with lower expenses.”

His credit card habit notwithstanding, Chase does try to keep his expenses in line. Yes, he does own a fairly new car (for which he pays $360 a month, on a 9% five-year loan). But, otherwise, he lives like a guy who values his financial independence. In fact, he figures that if he had to, he could live on a little bit more than $250 a week--a figure he calls his “fast food index”--a reference to the part-time, minimum-wage burger-chain job he had in high school.

For instance, he shares an apartment with a co-worker, keeping his rent at just $525 a month. He also tries--usually successfully--to save a few hundred dollars a month out of his paychecks. Fortunately for a music lover such as Chase, one of the perks of being a deejay is that he gets quite a few CDs free from record companies. If he weren’t getting them free, he admits, he’d probably be buying more than he could afford.

Chase may be in a better spot than a lot of 29-year-olds, but his long-term finances definitely need to be playing at a higher speed, said Brent Kessel, a fee-only certified financial planner in Santa Monica. Kessel’s major concern: Chase isn’t taking advantage of the station’s tax-deferred retirement savings plan.

In doing so, he’s not only giving up one of the best tax advantages around, he’s also squandering the enormous advantage of his youth. How so? Here’s a f’r instance: Savings of, say, $333.33 a month, or $4,000 a year, earning average annual returns of 8% will grow to almost $748,500 in 36 years. If Chase were to wait 10 years to start saving for retirement, he’d have to put aside about $780.13 a month (also assuming an annualized 8% return). Or, to look it another way, $333.33 a month saved for 26 years instead of 36, and growing at that same annualized 8%, would grow to just $329,817.

Chase attributed his reluctance to save in the company’s 401(k) to a desire to keep his retirement savings under his own control. However, although it is certainly legal for an employer to require that 401(k) savings be left with that employer until the individual turns 65--even if he has left that company’s employ--in practice few companies will do that.

In most cases, an employee can roll his 401(k) savings over into an individual retirement account when he is no longer on that company’s staff.

Chase has been passing up a good deal, Kessel said. Y107’s 401(k) matches 25% of employee contributions up to 3% of pretax pay. Kessel believes that, with just a little bit of discipline, Chase could comfortably contribute $4,500 annually to his firm’s retirement plan.

“You’ll regret not doing this,” Kessel told Chase. “If the amount I’m suggesting feels like too much money, start smaller and see if you can take it. Then you can ramp it up.”

Chase would also, for similar tax-related reasons, benefit from opening an IRA. Kessel suggested that Chase open a Roth. The biggest advantage with these IRAs is that not only do savings grow untaxed, as with a traditional IRA, but disbursements taken in retirement are not taxed either.

Now, what to buy? Chase has several stipulations.

“I want a place where money just goes and I don’t need to worry about it till I’m 65,” he said. “I’d like to leave it there and watch it grow. I don’t want to fret or worry.”

That leaves out individual stocks.

He’d also like to see at least some of his money invested in a socially conscious way--in part to assuage his conscience over a major indulgence, his 1996 Ford Explorer. “It’s a great car, but I’m responsible for a small hole in the ozone layer above it,” he said with a laugh.

In suggesting an overall long-term investment strategy for Chase, Kessel recommended a portfolio of stock mutual funds, pointing out that although such a strategy may sound risky, particularly given the market’s recent volatility, it represents the best chance for capital growth for Chase.

For someone as young as Chase, Kessel explained, time is on his side.

If Chase invests in good, solid stock funds that invest in good, solid companies, the planner said, “you can ride out a year when the market goes down 30%, because you know you’ll be OK--because you’re going to be there for 40 years.”

This strategy is not without its risks, however. Should Chase need to draw on that money, say, two years hence and the market is in a long-term slump, he could very well find himself in a bind.

Given the choices for Chase’s 401(k), Kessel recommended placing 80% in a mutual fund that mimics the blue-chip Standard & Poor’s 500-stock index and 20% in a fund that invests in international equities.

As for the $10,000 inheritance, the best thing Chase can do for himself is to take $2,000 of that and pay off his high-interest credit card debt ASAP, Kessel advised.

The roughly $8,000 that would remain would become the seed for a long-term investment strategy. In laying out possibilities here for Chase, Kessel in nearly every category offered a traditional suggestion and a more “socially conscious” one. Both planner and tune-spinner agree that the entire portfolio should not be invested in “socially conscious” funds, because many of these have not consistently offered returns comparable with their more conventional brethren.

Chase should dedicate 45% of the $8,000, or $3,600--to one of two funds investing in large-capitalization U.S. companies: either Vanguard Index-Trust 500 Portfolio (five-year average annual return: 19.54%); or Domini Social Equity Fund (five-year average annual return: 17.7%), which enjoys a reputation as one of the best-performing “socially conscious” mutual funds. This fund does not buy the stocks of companies involved in gaming, tobacco, alcohol, nuclear power and weapons development.

Twenty-five percent, or $2,000, should go to domestic small/midcap funds, either O’Shaughnessy Cornerstone Growth, a relatively new fund run by investment guru James O’Shaughnessy (one-year return: -22.26%) that invests according to a formula O’Shaughnessy calls strategy indexing; or Ariel Appreciation (five-year average annual return: 15.48%), which has a “socially conscious” bent and buys stocks thought to be undervalued but that the fund thinks are likely to grow.

Kessel suggested placing this part of Chase’s portfolio in the Roth IRA, particularly since Ariel Appreciation, which also invests in debt securities, has a greater potential for throwing off taxable income.

A 17.5% portion would go into an international large-cap fund, to either the “socially conscious” Citizens Global Equity (fund is less than 5 years old) or to the more conventional Vanguard International Value (five-year average annual return: 5.05%).

The remaining 12.5% would go into either Calvert World Values International Equity (five-year average annual return: 7.44%), which seeks “socially aware” foreign companies; or to the conventional Acorn International (five-year average annual return 8.40%), which invests in small and medium-sized foreign companies.

Should Chase decide to add a more conservative element to his portfolio, Kessel recommended Pimco Total Return Institutional III (five-year average annual return: 7.43%), a well-regarded bond fund individuals can invest in through a mutual fund supermarket such as those run by Charles Schwab or Fidelity.

A couple of other housekeeping notes: Chase might want to move his bank savings account funds to a money market account or mutual fund, either of which would offer him a better interest rate. Second, Chase would be wise to look into obtaining renters insurance. “It will protect your possessions, and it seems prudent,” Kessel said.

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Helaine Olen is a regular contributor to The Times. She can be reached by e-mail at holen@aol.com. To participate in 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. Questions or comments can be left at (213) 237-7288. We cannot respond to all inquiries.

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The Situation

* Investor: Chase, 29.

* Financial goals: Learn about personal finance and begin an investing program.

* The problem: Chase needs to save more and invest in an educated way.

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This Week’s Make-Over

* Investor: Chase, 29

* Occupation: Radio disc jockey

* Financial goals: Learn about personal finance and begin an investing program

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Current Portfolio

* Cash: $8,000 in a bank checking account

* Retirement account: $450 invested in an IRA in a bank money market account

* Debts: $2,000 on two bank credit cards; about $17,000 owed on 1996 sport-utility vehicle

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Recommendations

* Begin saving in employer’s 401(k) retirement plan and open a Roth IRA.

* With $10,000 inheritance, Chase should first pay off credit card bills, then assemble a varied portfolio of mutual funds.

* Because Chase has a long time horizon for his retirement savings and wants some of his money to be invested in a “socially conscious” manner, the planner recommended a portfolio that emphasizes stock funds and suggested several “socially conscious” mutual funds for Chase to consider. In making stock market investments at such a volatile time, Chase should be sure he’s using money he doesn’t expect to need in an emergency.

* Take emergency savings out of checking account and put into higher-yielding money market account or fund.

* Look into renters insurance.

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Recommended Mutual Fund Choices

* Acorn International: (800) 922-6769

* Ariel Appreciation: (800) 292-7435

* Calvert World Values International Equity: (800) 368-2748

* Citizens Global Equity: (800) 223-7010

* Domini Social Equity Fund: (800) 762-6814

* O’Shaughnessy Cornerstone Growth: (800) 797-0773

* Pimco Total Return Institutional III: (800) 927-4648

* Vanguard Index-Trust 500 Portfolio: (800) 523-8398

* Vanguard International Value

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Meet the Planner

Brent W. Kessel is the principal of Abacus Financial Planning, based in Santa Monica. In addition to provide fee-only advice, the company manages money for individuals, small businesses and charitable foundations.