Get With The Plan: November 2, 2008

Losing a job is always a scary event. In today’s bleak economy, it can be terrifying. That’s what Colleen, a single Middlesex County woman, is facing.

‘‘I’m worried about retirement and debt reduction, and primarily how to get by over the next 20 years,’’ she says. ‘‘I just lost my job in October, and I currently have no leads. This will be my third job loss in 10 years with significant periods of time with no income.’’

Colleen, whose name has been changed, has set aside $107,300 in 401(k) plans, $30,000 in IRAs and $5,000 in checking. Her only debt is a $32,000 mortgage and a $32,000 home equity line of credit.

The Star-Ledger asked Ronald Garutti, a certified financial planner with Newroads Financial Group in Clin- ton, to help Colleen pave the way through her uncertain future.

‘‘She will have eight weeks of severance,’’ he says. ‘‘She has known about this for a few months and has been searching for another job.’’

To start, Colleen should immediately file for unemployment benefits, which will help her cash situation a little.

Health insurance is another immediate concern, Garutti says. Colleen will need to start paying COBRA benefits to continue her health insurance, which will cost approximately $490 per month. As she receives severance, she should be able to cover the expense, but thereafter, money will start to get tight.

With Garutti, Colleen took another look at her expenses, and she thinks she’s underestimated her budget — a common mistake. Garutti says she needs to cut back on discretionary expenses such as dining out.

This job loss will further affect her already-struggling retirement picture. While Colleen was working, she was saving 4 percent of her $104,000 income into her 401(k), but now that ends.

During her other two job losses, Colleen took pre-591⁄2 withdrawals, paying significant penalties as a result. Garutti suggests she combine what’s left of her past 401(k) plans and make a move with her IRA, which is 87 percent invested in the stock of a former employer.

‘‘She was under the impression that she could not sell and diversify those shares,’’ he says. ‘‘She thought she could not sell those shares until she turned 59 ⁄2.’’

To explain why it’s important to consolidate and diversify her accounts, Garutti used this analogy: Colleen likes to dine out, so Garutti asked if she likes to go to the same restaurant all the time. Colleen says while she has a favorite place, she also likes variety. Garutti explained that if she leaves her 401(k) and IRA money where it is, it’s like eating off of the same menu at every meal — something she cannot control.

‘‘If she transfers the money to an IRA, she will be able to control the menu, and even get up and leave if she doesn’t like the menu in front of her, at any time,’’ Garutti says.

Colleen’s debt situation is a good one, with only a small mortgage and a small home equity line of credit, and she’s been paying down extra principal each month. Garutti recommends she consolidate these loans, paying off the first mortgage balance with her HELOC.

‘‘The downside is that the entire rate is variable at 4.49 percent, because she was an existing customer,’’ he says. ‘‘The upsides include a much smaller minimum payment in a time when her income is going away, and rates are low and would have to increase substantially for her to be affected.’’

Overall, he says the upside outweighs the downside. When Colleen finds a new job, she plans to continue to pay more than the minimum and hopes to have the debt paid off as soon as possible.