10 Money Tips for Unemployment Survival
This article was written by John F.Stohlman, MS, CFP, ChFC, CLU and Laura L.S. Stohlman, CFP,CSA,RFC. John and Laura are featured financial advisors in Boomerater's Gaithersburg Maryland financial advisor directory.
In the past year, millions of Americans have been laid off. In fact, the current unemployment rate exceeds 10.0% (Bureau of Labor Statistics, December 2009) and may be still growing! We are living through one of the worst (if not the worst) economic slowdowns since the Great Depression. According to Alan Greenspan (former head of the Federal Reserve) this is a once in a hundred year event.
The bottom line is: when you have lost your job - you have a problem. It is not only a financial blow, but it disrupts your life, your routines, and it can devastate your self-confidence. However, it is important to remember that this is a temporary and transitional period in your life. The sooner you become proactive, the sooner you can restore your income and get back on your feet financially. This is a time for action. Being proactive is both empowering and necessary at this time. Our hope is that these Financial Tips are helpful in guiding you if you are part of the current layoffs.
1) Determine where you are financially.
This involves listing all of your available resources and expenses. You need to know how much money you have to get you through the transition (your next job). Do you have 2 weeks, 2 months, or 2 years of expenses saved?
Resources include: Savings, investments, retirement accounts, cash value life insurance and lines of credit.
Expenses include: Rent or Mortgage payments, insurance, food, utilities, loans, and car notes etc.
Writing down your cash flow on paper can be calming. You will find out what you are spending or what the "burn rate" is of your assets. This will help you to know how quickly you need to get back to work. Finding any job ASAP, just to have paycheck coming in; or can you wait until you find your "career job". Once you complete the analysis, you can determine how long you have before you must take "any job". We have included a cash flow analysis sheet to help you.
2) Next, work on improving cash flow.
Look at where your money is going. In light of your new circumstances, you may need to re-do your budget. (I know I just used the "b" word.) No one likes budgets. However, you need to get over it. "Financial Survival" is not for sissies.
Here is a short list of ideas to reduce your expenses or increase income:
a. Eat out less
b. Have a yard sale
c. Sublet a room in your home or apartment.
d. Shop for bargains, clip coupons
e. Lower your thermostat and wear sweaters more often
f. Restructure your credit card balances to the lowest rate.
g. Increase deductibles on auto and home insurance. (But only if you have enough cash saved to cover those deductibles)
h. Cable TV costs and gym memberships should be examined for reduction or elimination depending on cash flow, even if only temporarily.
i. Take a part-time job on weekends if possible.
j. Sell that extra car
k. Take mass transit (you will need to do a cost comparison first)
l. call your utility company and ask for someone to come out and do an "Energy Check-up" on your house.
As you get going, you may think of other things you can do! Financial professionals agree that it is important to keep an open mind in these times. The main goal is to keep your head above water financially. Hopefully, these budget cutbacks will be temporary, but the facts are that the economy may take a long time to recover from this hopefully once in a hundred year event. Lastly, encourage the members of your household to try to increase their earnings if possible and work together as a family to reduce or postpone expenses.
3) If you qualify for Unemployment, GO GET IT!
Occasionally, when consulting with someone who feels that filing for unemployment is beneath them and the benefits are not worth the effort. To them we say, "Maybe you better research that!" The traditional unemployment benefit lasts for 26 weeks and can pay up to $318 per week. Currently, the Federal programs have extended the benefit period by an additional 20 weeks and increased the base payment by $25 per week. If you live in Maryland you can obtain additional information about benefit eligibility by visiting www.mdunemployment.com and requesting the pamphlet: What You Should Know about Unemployment Insurance.
4) Examine your Health Insurance options
One of the most valuable benefits of being employed with a large company is subsidized group health insurance. A large corporation can often spread the risk across a large population of employees and savings can often be passed on to the group resulting in lower premiums, low deductibles and good coverage. COBRA coverage is generally available for 18 months after you leave your job. But, if you enroll in COBRA you must pay the entire cost of the coverage plus a 2% administrative fee. According to USA Today the Average COBRA premium exceeds $400 a month for individuals, and more than $1000 a month for families.
The recently signed stimulus package created a subsidy that reduces the COBRA premiums for those that were laid off after September 1st of last year by 65%; thus reducing the premiums to $140 and $350 a month respectively. This subsidy began March 1, 2009. For more information go to www.dol.gov/cobra.
If you still find these premiums hard to afford, even after the new subsidy, and you do not have pre-existing health conditions, you may be eligible to find inexpensive health coverage by applying directly with independent insurance carriers. This is also called "catastrophic" coverage. To explore this option go to www.ehealthinsurance.com, a website that allows consumers to shop for individual plans or call your local independent insurance agent.
5) Other Employee Benefits to Consider
It is important to understand the benefits you are leaving behind and which benefits can be taken with you when you leave. We already covered health insurance. Some company's allow group life insurance to be taken with you on termination. Still others will offer a "conversion option". These may be of particular importance if you have a health condition that may prevent you from obtaining coverage through an independent insurance company.
You should also collect and understand brochures describing your pension benefits, 401K, TSA, 403B or deferred compensation plans, whichever you have. These are important for your ultimate retirement and may also be used to help cover expenses as you transition to your next job. These assets may need to be accessed if emergency funds are needed. Of course, pension and deferred compensation plans have tax ramifications on the withdrawals which I will discuss later in the report.
6) Reallocate a portion of your Assets
One term you will often hear Financial Planners refer to is your investment "time horizon". This is the length of time you estimate you have to invest your funds before needing them for withdrawal or to produce income. Typically, the longer your time horizon, the more aggressively or growth oriented your assets will be. If, on the other hand, you have a short time horizon your assets will be more conservatively positioned, which may point to a higher allocation in bonds, cash or other historically less volatile investments.
One possible consequence of being laid off is that you may need to convert some of your long-term assets for immediate need withdrawals in order to pay bills. This can be particularly difficult when your stocks or equities are down as they likely are as of this writing. What may be advised is to look at your assets and consider lowering your percentage of equities on the assets that you believe may be needed over the next 12 months while searching for your next job. This may prevent further erosion from short-term declines in equities. Of course, it could also mean you miss any potential growth if the market rebounds. It is important to understand your investment options before making any allocation changes. This is why I recommend careful study of your financial situation and seeking the consultation of an experienced advisor.
7) Consider the taxes before withdrawals!
Most people who have retirement accounts realize the importance of leaving the accounts alone until retirement age. The government has a number of rules and penalties to discourage withdrawals from retirement accounts before age 59 1/2. These are also called "Qualified" accounts. If your situation looks as though you need to make withdrawals from your IRA, 401K or other qualified account(s) to survive financially while looking for your next position, you should be aware of the associated taxes. Investments in retirement accounts are typically tax deferred, therefore, when making withdrawals you will need to include those disbursements as income in the year you take the money. An additional 10% early distribution penalty tax may be imposed if you are below the age of 59 1/2 at the time of withdrawal.
There is no penalty for withdrawals over the age of 59 1/2, except for Roth IRA's, which need to be held for 5 years.
The government does allow a few exceptions to avoid the 10% penalty, but the withdrawals still remain subject to income tax.
Leaving Your Job On or After Age 55
Employees, who retire, quit or are fired any time during (or after) the year they turn age 55 may make withdrawals without the 10% penalty on their 401K. If you were not at least age 55 when you left that employer, you will have to wait until age 59 1/2 in order to avoid the penalty tax. It is important to know that this exception applies only to your current employers 401K, not old 401K's from previous employers; unless those old 401K's were rolled into your current 401k before you were laid off or retire.
This exception does not apply to IRA's. These and other retirement vehicles operate under different rules. So, if you roll money into an IRA from your 401K before age 59 1/2 you will lose this exception on those dollars. For more information see IRS Publication 575.
Substantially Equal Periodic Payments
The substantially equal periodic payments exception is available to anyone with a 401k plan, or IRA regardless of age. Using this exception called Section 72(t) the distributions are based on your life expectancy and qualify as "substantially equal" payments. Once this distribution option has begun the distributions must continue for a period of five years of until you reach age 59 1/2 which ever is longer. It is important to understand that this distribution option is very rigid and if you withdraw more or stop the substantially equal payments, the IRS will impose back taxes. You should take into consideration the possibility of depleting your retirement account well before the end of your life expectancy. For a full discussion of the rules see the IRS Publication 590.
Prior Loans on 401k
Most financial planners will advise you not to borrow money from your 401k because you are borrowing from your future by missing out on market gains. However, this year's loss of market gains has not been the problem. Another drawback to 401K loans is that when you are laid-off or fired the balance of your loan usually becomes due immediately. If it is not re-paid it becomes an early distribution and is subject to the above-described 10% early withdrawal penalty (if below 59 1/2) in addition to any regular income tax and interest charges.
8) Create a "Marketing Budget" for yourself.
Possibly the most important budget you need to fund when you are laid off, is your Marketing Budget. Both of us agree that you need to have nice clothes and be well groomed. You should also have high quality stationary for business cards and resumes. With all of the competition out there you need to stand out. What we are not saying is to go out and spend money unnecessarily. Go through your wardrobe first and access what you own; clean and press outfits first. Polish the shoes you have. Give your spouse or close friends a fashion show and ask their opinion.
Also, don't forget you will need to set aside funds in your budget for updated technology to be able to respond professionally when a prospective employer contacts you. An up-to-date computer with printer and software is very important.
Ask your family and friends to let you know if they hear of someone hiring. Always go through the newspapers and use online jobs sources too. It is also important to invest in networking events and conferences. Although these events can sometimes cost money, they may ultimately lead to your next job!
9) Try to minimize credit card use.
Credit cards have become a part of our daily lives. Many people today rarely carry cash and just use a credit or debit card instead. It is important to understand the long-term consequences of large credit card balances. As we all know, credit card interest rates can get as high as 20% or more per year. As Warren Buffet said last week on CNBC, "I can't even make money if my cost of capital is 18% or higher."
Paying the minimum payment means that it will take 11 years to pay off your debt, but that's if you never charge anything else and your interest rate in never increased... so be very careful here, you do not want to create a financial "black hole."
10) Analyze the risks of Company Stock.
An employee who retains company stock after being terminated needs to assess the risks of that stock from a practical perspective. How is your company doing financially? Will they survive the downturn? As a past employee you will not have a vested interest nor will you have an intimate knowledge of the fortunes of the company. In addition, there may be a negative emotional factor involved in keeping this investment.
We hope we have gotten you started on the right path. Going forward, you should review your overall situation every few months to maintain control of your finances. This will help to ensure realistic solutions and procedures that will hopefully alleviate some of the stress. Lastly, we will leave you with an unknown quote, "It is not necessary to know everything, but only to know the people who know the things you don't." There is nothing wrong with asking for help. So, if you cannot do it, please ask someone for help...
John Stohlman and Laura Stohlman, owners of Medallion Financial Group, are CFP®'s, financial planners and Registered Representatives with over 25 years of experience in the financial services industry, offering securities and advisory services through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. Medallion Financial Group and NPC are separate and unrelated companies. Medallion manages over $250 million of client assets. For further info, questions or comments regarding this article, John and Laura can be reached at 301-990-9704 or 1-800-878-9704.
National Planning Corporation does not endorse the opinions expressed in this column. The information here is not to be considered as financial, tax or legal advice. As with any financial, tax or legal matter, consult your qualified adviser before taking action. No investment strategy can ensure a profit or protect against a loss. Past performance is not indicative of future results.