Mike is ready to enter a new world. The Passaic County man wants to leave his lucrative salaried job and start anew.
‘‘I want to maintain my lifestyle and keep my townhouse, but change careers, becoming a freelance writer,’’ says Mike, 43. ‘‘This means a huge pay cut.’’
Mike (whose name has been changed) has set aside $122,750 in his 401(k) plan, $57,700 in IRAs, $12,175 in a brokerage account and $62,000 in checking.
The Star-Ledger asked Jim Fusaro, a certified financial planner with Fusaro Financial in Mountain Lakes, to help Mike see if he’s ready for a huge change in his income.
‘‘He needs to take on some calculated risks,’’ Fusaro said. ‘‘Making some adjustments to his current financial lifestyle needs to be implemented.’’
The first order of business is to accumulate enough cash to support Mike’s lifestyle so he doesn’t have to count on a paycheck to pay the bills. Mike has, on an ‘‘after-tax’’ basis, 12 months’ worth of savings in a checking account that earns a nominal rate of interest. Also, outside of his retirement plans, he has $12,175 in a brokerage account, invested in only two stocks.
To add more cash to his accounts, Mike should consider reducing his retirement plan contributions from the current 13 percent to save just enough to get the full em- ployer match, which would be 8 percent of salary.
‘‘He should put the difference into his savings account, which will allow him to build a larger cash reserve,’’ Fusaro said.
The next big deal: Mike has an adjustable-rate mortgage that will come due in the middle of 2008. Now is a very smart time to refinance to a low fixed-rate loan, which will allow him to lock into a good rate and make sure his payments don’t fluctuate in the years to come.
‘‘In sync with refinancing his first mortgage, he should apply for a home-equity loan while his income is steady and secure,’’ Fusaro said. ‘‘This will afford him the opportunity to have readily available cash as he invests into his new venture.’’
Even with lower home values, Mike has $135,000 worth of net equity in his home, so he should get as high a line of credit as he can. Fusaro said it’s more than likely the cost to initiate the home-equity line of credit will be nominal at worst.
Mike needs to prepare a new budget for himself. Once he has the new mortgage, he doesn’t anticipate any major changes to his expenses. The budget will allow him to see exactly how much income he will need.
One major change to the budget will be health-care expenses, which could run hundreds of dollars a month. Today, Mike’s employer pays the bulk of the costs; when Mike leaves, he will be responsible for his own health care. He can choose to maintain his current coverage with the company through COBRA (the Consolidated Omnibus Budget Reconciliation Act) for 18 months after he leaves his job, but he’ll be responsible for the full cost of premiums. That’s a start, as Mike shouldn’t go without health care. Then he can start researching individual plans, which he may find at cheaper prices through any associations he belongs to, including professional organizations and alumni groups.
Then he needs to research his new career.
‘‘He should research the market while making contact with others who have traveled his desired path to understand the pros and cons of his dream,’’ Fusaro said. ‘‘In addition, he needs to establish a well-thought-out business plan, complete with a proactive marketing strategy.’’
Mike should also re-examine his portfolio. His current employer’s plan is very limited in investment choices, so once he does leave his job, he should roll over his deferred assets into a self-directed IRA for more control and choices, Fusaro said.