Julie is defining her new life. At age 49, she’s recently divorced, with two children, ages 10 and 12. She has a laundry list of financial goals, and she needs a plan.
‘‘My goals are retirement, college planning, vacations, liquid savings and being able to live comfortably without worrying about bills month to month,’’ Julie says. ‘‘I need to get ‘miscellaneous’ spending under control.’’
Julie, whose name has been changed, has saved $221,593 in 401(k) plans, $14,400 in a brokerage account, $20,000 in bonds, $7,070 in savings and $9,106 in checking. She has $18,630 set aside for college funding, and she recently put $200,000 of cash down on a new home. Julie is also expecting a pension worth about $30,000 a year if she retires at age 65.
The Star-Ledger asked Greg Plechner, a certified financial planner with Greenbaum and Orecchio in Old Tappan, to help Julie get on track with her savings and spending plans.
‘‘If she is confident that she can continue to have high earnings to age 65, her long-term financial plan looks good,’’ says Plechner. ‘‘However, there are concerns about her tendency to take on debt to fund her lifestyle.’’
Julie’s biggest financial challenge today is making sure she protects her income. She needs disability insurance to replace some of that income should she be unable to work. Additionally, she has to make sure she remains marketable in this uncertain job market. Even if she thinks her employment is secure, she should take steps to ensure her skills are transferable if she ever needs to find new work.
Next, Julie is far too quick to borrow to pay for the things she needs or wants. To change this habit, she simply needs to stop spending so much, instead earmarking her extra cash for a cash reserve or emergency fund.
Fortunately, Julie’s income allows her to afford her new home — but that’s also thanks in part to the large down payment she put on the home. Part was funded by cash savings, but some of the funds were ‘‘borrowed’’ from municipal bonds that were earmarked for her kids’ college educations. While she plans to replenish those funds, it’s another symptom of her ‘‘borrow to buy’’ mentality. Another debt she took on with the intention of paying it back was a recent $30,000 loan from her 401(k).
‘‘The real answer is to make more money or lower life- style expenses, and not borrow against retirement account,’’ Plechner says. He worries if she quits or is laid off from her job, Julie will have to pay back the money in a lump sum or face a 10 percent penalty and having the funds taxed as regular income.
For most clients with a cash cushion shortage, Plechner suggests a home-equity line of credit as a back- up plan. But for Julie, he’s concerned she’d see the check- book and start spending this emergency fund on non- emergencies.
Julie’s long-term savings goals also will be better managed if she spends less. If she wants to save enough to cover 50 percent of her children’s college costs, she’d have to save $750 a month (assuming a $20,000 a year tuition bill).
‘‘She is way behind on this objective,’’ Plechner says.
Julie also could do better for retirement savings, which would in turn help her tax situation. She’s in the 28 percent Federal and 6.37 percent State tax bracket, so she should lower her taxable income by maxing out her 401(k). She currently saves 11 percent of her salary.