Signing On to a New Plan

In an age in which the involuntary career change is common, L.J. Carusone has been through it, facing something every working person dreads: taking a pay cut.

Carusone, 30, now works as a Web page designer for the gay magazine Frontiers in West Hollywood. It’s creatively fulfilling, but his income is about $5,000 less than it was five years ago, when he was making $40,000 a year as a television production assistant.

“I never thought I would be making less at 30 than I was at 25,” he said.

The last of Carusone’s several TV jobs ended abruptly last fall when the show he was working on was canceled. Losing that job was a turning point: He realized that he needed to be in an industry with some stability. And although he was a little reluctant to admit it, his 30th birthday shortly thereafter brought another reality check.

“I think I did start thinking to the future,” he said. That meant considering home ownership and children and thus, for the first time in his life, thinking seriously about money.

Carusone had just $400 in his pocket when he arrived in Los Angeles eight years ago after graduating from the University of Vermont. Like so many others, he wanted to be part of the glamorous business of making films and TV shows. Also like so many others who have discovered that jobs in the entertainment field are hard to come by, he had to endure humiliations such as living in an abandoned house that had grass growing in the living room.

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In his 20s, he didn’t mind living hand-to-mouth or driving a $400 car. The idea of owning a home, with its attendant responsibilities, was about the furthest thing from his mind.

It isn’t now. As he’s gotten a little older, Carusone has realized how much financial security means to him.

Actually, thanks largely to help from his family, he’s in surprisingly good financial shape considering the sporadic nature of his previous career. Even though he is making less money now, having a stable income means he should be able to stick to a plan and meet his goals, said Howard Rothwell, a financial planner with Swarthmore Financial Advisors in Media, Pa.

If he starts saving right away, that is.

“You may feel like you are choking along the way,” Rothwell told him, “but that has to be the key.”

Fortunately, Carusone has that head start from his family, which has given him some stock and mutual funds, and a lot of sound advice.

Although initially indifferent to the idea of investing, he is now most grateful that his parents and grandparents got him started, then nagged him to put money into his individual retirement account every year. His IRA now accounts for nearly half the roughly $85,000 he has invested.

“I didn’t realize at the time how great these gifts were, but now I appreciate them more than anything,” he said.

Shortly after losing his job at Walt Disney Co. last fall, Carusone, always adept with computers, purchased three 600-page computer manuals and taught himself HTML, the computer language used to create World Wide Web sites on the Internet, and began pursuing a new career as a designer.

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He finds comfort in having a regular paycheck, albeit a lower one, and he’s at an age and making enough that he can start a savings plan in earnest, the planner said.

The thought of forcing such discipline on himself, though, made Carusone wince. Money management just isn’t something he has wanted to expend much effort thinking about.

Here’s what Carusone knows about how he spends his $1,880 monthly net income: $350 goes toward the rent on the Venice house he shares with two friends; $305 helps pay off the $6,000 loan on his 1996 Honda Civic; about $100 goes toward paying down credit card debt of $1,300.

Where the rest goes is a mystery, Carusone said.

He admits to no extravagances. He says he eats out about three times a week but rarely spends more than $15 on a meal. His entertainment budget is not large, and he often can get discount tickets to movies.

He has a penchant for travel, however, and takes several trips a year to visit friends on the East Coast and in the Rocky Mountains. He has no idea how much he spends every year making these visits.

Rothwell pointed out to Carusone that, extravagances or no, exercising a little restraint now will pay off later in achieving goals such as buying a house and affording a family, and in saving for retirement.

Carusone should learn to live on two paychecks a month, Rothwell said. Since Frontiers pays Carusone every other week, twice a year he will receive three paychecks in a month. Rothwell advised depositing those in his IRA. That will just about get him to the current maximum $2,000 deposit allowed each year. Since he has no pension plan, those deposits will be fully tax-deductible, and thus the contributions will really cost him closer to $1,400 because he will be paying less in taxes.

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Carusone’s IRA was started at the insistence of his folks when Carusone graduated from high school. On the advice of his father, a lawyer in Upstate New York, Carusone has made annual deposits in the account, which is now worth $42,000. All the savings are invested in the Mutual Qualified fund, a member of the Mutual Series family of mutual funds.

Mutual Qualified, a growth and income fund, has been a high performer, returning an average of 20.3% a year over the last five years.

It has been a great investment, but Carusone, like any investor, needs to be diversified, Rothwell said. Given Carusone’s age, Rothwell said, the stock market is not only a safe bet but the best one, so long as he invests in a mix of funds that complement one another.

Rothwell suggested that Carusone put one of his annual IRA deposits in Mutual Qualified and the other into Mutual Discovery, a newer fund that invests in small companies. Transferring investments within fund families is easier and often less expensive than buying new funds, and it can be a wise move so long as there are good choices available. With Carusone’s Mutual investments, he won’t have to pay a sales charge to buy into Mutual Discovery. (Mutual Series was merged last year with Franklin Templeton, which does charge for transfers, but because Carusone owned his Mutual Series fund before the merger, he can transfer among Mutual Series funds at no charge.)

Assuming Carusone adds $2,000 each year to his IRA and averages a 10% annual return for the next 35 years, the retirement account will blossom to $1.7 million by the time Carusone is 65, Rothwell said. But even a smaller average annual return should allow him to retire comfortably.

Carusone hopes to be able to buy a $200,000 house within five years. Rothwell said that goal is within Carusone’s reach if he starts setting aside $225 to $250 a month now toward a down payment and invests it in stock mutual funds.

Rothwell suggested that these savings be split between Janus Worldwide (five-year average annual return: 21.1%) and Baron Asset (five-year average annual return: 24.2%), which invests in small companies. With those two funds, Carusone will be exposed to different parts of the stock market than he is in his IRA. And these two funds have very good managers and have had excellent returns recently, Rothwell said.

Carusone should keep an eye on all his mutual funds, the planner said, making sure their performance isn’t lagging.

Such is the case with an investment in Pennsylvania Mutual now worth about $10,000.

Carusone’s grandfather invested in the fund for him when Carusone was a teenager. During the 1980s, Pennsylvania Mutual made a name for itself in small-company stocks, outperforming similar funds by a mile. It has lagged in the 1990s, however, clocking an average annual return of just 11.48% in the last five years, meaning its investors have not fully participated in the current bull market.

Swarthmore has struck Penn Mutual from its list of recommended mutual funds, and Rothwell advised Carusone to sell it. Though Carusone will have to pay a capital gains tax on the sale, he’ll be better off in the long run with that money in better-performing funds.

Carusone’s single largest holding, also from his family, is in common shares of Evergreen Bancorp Inc. stock, now worth about $28,000, Rothwell suggested holding onto most of it. Evergreen is the holding company for a regional bank in Upstate New York. Consolidation in the banking industry is continuing at a rapid pace, Rothwell said, so it is possible that Evergreen could be gobbled up by a larger institution--at which time its shares would be likely to increase in value. Nonetheless, Rothwell said it might be prudent to reduce Carusone’s exposure to the fate of one company by slowly selling at least some shares over the coming months, transferring the money to mutual funds.

He cautioned Carusone that Evergreen should be the last common stock he owns, at least for now.

“I would rather see you aggregate in mutual funds right now until you have a little capital,” Rothwell said. “You are investing such a small amount of money it is not worth the aggravation of trying to pick individual stocks.”

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Rothwell then turned to the matter of estate planning.

Carusone has $2,300 invested in a life insurance policy, but because he has no dependents, Rothwell said, it’s not worth keeping.

Instead, Carusone should create a cash reserve to be tapped in an emergency, Rothwell said. To do that, he can use the cash value of the insurance plus $4,750 in various bank checking and savings accounts. Rothwell suggested putting this sum into a money market fund, which should yield a greater return than Carusone could get from a savings account.

He should also invest in disability insurance, Rothwell said. Though it may cost him $700 to $800 a year he’d rather spend on something else, it will guarantee he’ll have an income if he is injured and unable to work.

As for children, Rothwell said Carusone can plan for a family later if that becomes a possibility.

Overall, Rothwell told Carusone, “you may feel like you are really struggling, but you are in pretty good shape.”

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Hope Hamashige is a regular contributor to The Times. If you want to participate in a 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. Information about choosing a financial planner appears at The Times’ Web site. Point your browser to https://www.latimes.com/HOME/BUSINESS/FINPLAN

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This Week’s Make-Over

* Investor: L.J. Carusone

* Age: 30

* Occupation: Web page designer

* Gross annual income: $35,000

* Financial goals: Save for a down payment on a home and for retirement

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Current Portfolio

* $42,000 in Mutual Qualified, a growth and income mutual fund, held in an individual retirement account

* $28,000 worth of common stock in Evergreen Bancorp, a regional bank

* $10,000 in Pennsylvania Mutual fund

* Cash value of $2,300 in life insurance policy

* About $5,000 in savings and checking accounts

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Recommendations

* Keep a tighter rein on expenses, pay off credit card debt quickly and start saving in earnest to achieve shorter- and longer-term goals.

* Cash out of life insurance. Buy disability insurance and increase cash reserve to about $7,000.

* Trim Evergreen Bancorp stock over the coming months.. Immediately sell holding in the laggard Pennsylvania Mutual small-stock fund.

* Diversify mutual fund investments. Split future IRA deposits evenly between Mutual Qualified and Mutual Discovery, a small-stock fund ([800] 553-3014). New savings of $225 to $250 a month plus the proceeds from the sale of Evergreen Bancorp stock and the Pennsylvania Mutual fund holding should go into Janus Worldwide, a global fund ([800] 525-8983), and Baron Asset, a small-stock fund ([800] 992-2766).

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Meet the Planner

Howard Rothwell is a principal at Swarthmore Financial Advisors in Media, Pa. He received a master’s degree in business administration from the Wharton School of Finance at the University of Pennsylvania. He offers financial planning and investment advice.