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The Honolulu Advertiser
Posted on: Sunday, February 27, 2005

Stash new-found cash in stocks, teacher told

By Deborah Adamson
Advertiser Staff Writer

What do you do with $80,000? Chris Akahoshi is counting the ways.

Chris Akahoshi says that while he can teach technology, personal investing is "totally Greek to me."

Jeff Widener • The Honolulu Advertiser

It's a delightful dilemma faced by the teacher and technology coordinator, who came into his windfall after selling a condominium in 2002 he shared with a sister. The condo was a gift they received years ago from their parents, who live on the Big Island.

Perhaps he could transform a room in his current Mililani house into a home theater, complete with a top-of-the-line projector and surround sound system? Maybe he could swap his reliable but unexciting Honda Accord for a macho Ford Escape SUV? It's got to be white — cooler in this tropical heat.

But being the responsible guy that he's always been, Akahoshi, 42, definitely will leave much of the money for investments. That's because in spite of the goodies he wants, there's something else the bachelor desires even more: financial freedom.

"Financial independence — that sounds good," said the Mililani Middle School employee. But "I'm not real good at investing. I can read tech manuals, but you open a prospectus, that's totally Greek to me."

Right now, the money is sitting in a bank account earning less than 1 percent a year. Akahoshi will use some of it for his new car and home theater, but he plans to shovel the bulk of it into an investment. But which one?

He's read investment books, including one in the "Dummies" series, but came away with conflicting concepts.

"You've put in more effort than others in doing your research," commended Martin Arinaga, a certified financial planner and partner at Chinen & Arinaga Financial Group in Mililani. But "you're overanalyzing to the point that you're confused and you're fearful."

But what Akahoshi should do with the money must be considered in the broader context of his finances to determine where it can best be deployed.

Crunching the numbers

The candidate: Chris Akahoshi

Age: 42

Job: Teacher and technology coordinator at Mililani Middle School

Hawaiian Airlines customer service agent

Annual income: About $60,000

Debt: a $180,000 mortgage

Savings: $80,000 in the bank

Goals: To be financially independent and afford retirement at 55

To get a higher return on investments

The financial planner: Martin Arinaga

Credentials: certified financial planner; chartered financial consultant; past president, National Association of Insurance and Financial Advisors, Honolulu chapter

Company: Chinen & Arinaga Financial Group

Address: 95-720 Lanikuhana Ave., Suite 220, Mililani, HI 96789

Phone: 548-2234, ext. 814

Years of experience: 22

Areas of expertise: Retirement planning, insurance and investments

Fees: Commission on investments, 1 percent to 2 percent of portfolios worth $250,000 and up

The makeover

• Invest more aggressively into a diversified portfolio of stocks

• Increase mortgage payments by $275 a month to pay it off in 15 years

• Maximize contributions to retirement accounts

• When the time comes, consider an early Social Security payout

At least, it won't be hard for him to make changes. When it comes to his household balance sheet, he's in good shape: no personal debt beyond his mortgage. Akahoshi pulls down about $60,000 a year from two jobs. In addition to working at the middle school, he also works weekends as a customer service agent for Hawaiian Airlines.

While he's generally akamai about money, he can learn to be even more astute. If he continues to earn less than 1 percent on his investments, inflation will eat up the gains on his savings. To position himself well for retirement, the baby boomer should have some higher-return investments.

"You have cash. Cash is good. But cash in the bank — you're losing money," Arinaga said.

Should he use the extra cash to pay down his $180,000 mortgage? Akahoshi's mortgage interest rate stands at 5.87 percent, fixed for 30 years.

The financial planner said Akahoshi might consider using the condo windfall toward the mortgage if the money cannot earn more than 5.87 percent before taxes elsewhere. But that's not the case.

"In today's environment, is it possible to beat that? Yes," Arinaga said.

He recommends investing 70 percent of the money into mutual funds invested in small, large, mid-cap and international stocks where an average annual return of 8 percent is possible to achieve. At his age, Akahoshi has time to ride out the volatility of the stock market. The rest of the condo money can be invested in bonds.

If he wants to pay down his mortgage faster, he can raise his payments by $275 a month to shorten the loan to 15 years from 24 years, Arinaga said. Alternatively, he can choose to refinance to a 15-year mortgage if the savings is greater than the fees he has to pay.

To beef up his savings, Akahoshi should put in as much money from his salary as he can into a 403(b) retirement plan with the majority invested in stocks, Arinaga said. He should also look towards contributing to the state Deferred Compensation plan, another type of retirement program. If he can, he should also try to put in the allowed maximum for a Roth IRA this tax year — $4,000.

At least Akahoshi can count on a good pension payout. When he reaches 56, he'll have been a Department of Education employee for 30 years. Assuming an average final monthly compensation of $6,900, Akahoshi can get as much as $2,600 a month for life from his state pension, assuming no benefits to survivors.

If he chooses a 10-year guarantee option and he dies within a decade after retiring, his beneficiary gets the monthly payout for the remainder of the 10 years. But the option lowers Akahoshi's monthly check to $2,500.

With a 50 percent joint and survivor option, he gets just over $2,300 a month, but his survivor gets $1,164 monthly for life. The 100 percent joint and survivor option gives him the least money up front — about $2,100 — but his survivor gets the same amount after his death, for life.

As for Social Security, Akahoshi cannot tap the money until at least 62. If he waits five more years to collect, he'll get a higher monthly payout.

Arinaga said Akahoshi should take the early payout at 62 even with diminished monthly payments because he'll likely end up ahead.

Here's why. At 62, he stands to get $1,200 a month. At 67, he'll get $1,765 monthly. For the five years that Akahoshi is getting Social Security, he would receive a total of $72,000 — $1,200 multiplied by 12 months for five years.

If he waits until 67 to get Social Security, he will get $565 more a month. It would take about 127 months — or 10.6 years — for him to rack up $72,000. That means he has to live until 77 to receive the same amount he would have gotten if he began taking Social Security early, Arinaga said.

Moreover, he can increase his overall take if he invests part of his early payout of $72,000.

The calculation assumes Social Security payments or restrictions don't change. There's a big fight in Congress now on how to make Social Security solvent. Social Security is expected to start tapping into reserves at 2018. By 2042, payments will be able to cover only 70 percent of benefits.

"Could they increase benefits? Yeah, when pigs fly I suppose," said Arinaga, remembering that past changes in Social Security whittled benefits for retirees. "It used to be all tax free."

Under current rules, Akahoshi would have as much as $3,800 a month before taxes, or $45,600 a year, at 62 from the state and Social Security. But that money won't buy as much in two decades as it would today. Akahoshi has to rely on his own savings as well.

"You won't be destitute, you won't be living out of a shopping cart, but you're not out of the woods, either," Arinaga said.

One reason: As one gets older, long-term care and prescription drug expenses loom.

At least Akahoshi's house should be paid off by then. He can sell the house and move into a condo or less expensive area and pocket the savings. If he needs to, he also could take out a reverse mortgage with the equity he would have in his home, the financial planner said.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.