Thursday, January 3, 2008

Financial Preparedness: How to Survive Financially After a Job Loss

You may have joined or are about to join the ranks of the unemployed. Now what?

Don't panic. Take a deep breath. You'll get through this, though it might appear pretty gloomy at the moment. In fact, losing a job may actually turn out to be an opportunity to land a better job or a new career.

Don't make any hasty financial decisions. In times of such stress, it's easy to make hasty financial decisions that turn out poorly. So, in the immediate wake of your job loss, don't cash in your retirement plan, sell off long-term investments or move until you've worked out a realistic plan for dealing with your reduced income.

Put a plan into place

Start looking for work immediately. Many newly unemployed assume they'll find a job quickly and decide to take a little vacation before initiating their job search. As appealing as it sounds, this is probably a bad idea. You may be misjudging the job market and your ability to secure a comparable position, especially when unemployment is high and the economy is struggling to recover from a downturn. If that is not enough to convince you consider pounding the pavement instead of hitting the beach, experts warn that potential employers may not be impressed with a six-month gap in your employment history. Additionally, while you're soaking up the sun, you're draining precious financial resources, such as an emergency fund or severance pay, which you could put to better use.

Reassess your career. A job loss may be a good opportunity to reassess your career. However, before launching into a new career during a time of unemployment, answer honestly the following questions.

  • Is it realistic to make a change? It can be costly to abandon a career in which you have years of experience in order to tackle a career for which you may have little or no experience.
  • Are you qualified for this new career?
  • Are your job skills and education up-to-date?
  • Can you afford to invest the time and money to upgrade or learn new skills?
  • Do you have the money to live on while you make the transition? For example, some financial planners having at least two year's worth of living expenses available if you plan to start your own business or consulting firm, that's not including any investment needed to start the business.

Where to look for work. Now is no time to be shy or embarrassed about your job loss. Announce it to everyone you know: friends, colleagues, family, old high school chums. Network with people in your field. Join or make use of trade association membership to circulate your resume and learn about jobs. Other job sources include the newspaper want ads, online sites, professional job search services, government employment agencies, job fairs, and job-hunting services offered by your former employer. Your former employer may even have openings in other departments or divisions.

Financial Steps to take while looking for work

Promptly file for unemployment insurance. Not all workers are entitled to unemployment insurance. To help qualify, you'll want your employer to confirm that you were laid off instead of resigning or being fired for cause.

Handle severance package with care. Your employer may offer a severance package, probably before you are dismissed. This package typically extends salary and perhaps benefits for a certain dollar amount or period of time.

  • Don't sign on the dotted line until you take it home and review it closely. Consult your Certified Financial Planner or perhaps a benefits attorney about issues you don't understand. Keep in mind, this is a legally binding contract.
  • Review your employee handbook. See what benefits are promised to departing employees. Make sure the company pays you for unused vacation or compensation time, and perhaps a pro-rated year-end bonus, especially if you're near the end of the calendar or fiscal year. Learn what fellow laid-off employees have been offered.
  • Negotiate the severance package. You may have more leverage than you realize. Did you recently move across the country to take the job? Did you make the company money because of your special skills or a particular project you headed? Put forward anything that individualizes your situation. Talk with the person who extends the package, or go to their superior if you remain dissatisfied with the response. Some workers even hire an attorney. However, be careful not to say anything you'll regret. Burning bridges will hurt any possibilities of being rehired and lessen your bargaining power for a severance package or a strong letter of recommendation.

Negotiating Points. For example, if the company offers two weeks of severance for each year worked, ask for three weeks or a month for each year you worked.

You may need to choose whether to collect the severance pay over time or in a lump sum. Taking it over time may extend valuable employee benefits such as health care coverage and retirement plan funding that might otherwise end immediately. Spreading out the payments also could keep you from jumping into a higher tax bracket for the year.

On the other hand, taking the pay in a lump sum avoids the risk that the company might go bankrupt and not be able to make extended payments. You also might want the lump sum if you plan to put the money into finding another job or launching your own business.

Negotiate continuation of company--paid health benefits when possible.

Typically, if you leave before vesting your pension benefits or stock options, you lose the benefits. However, if you're close to vesting, you might persuade the company to keep you on the payroll until then, even if it means losing some pay from your severance package.

If federal stock option or pension rules forbid your request, ask for a cash settlement in lieu of the outright benefits.

Bargain for years of work credit that will make you eligible for early or full retirement benefits.

Vested stock options might need to exercised within a certain time, such as 90 days, or you lose them. You may be able to negotiate an extension. However, review carefully with your financial adviser whether it's wise to delay the exercise and sale of stock options, particularly if the company is in financial difficulties.

Negotiate for the best references you can get, not merely a verification of your employment dates and salary. This may be more important than anything else, because your future work may hinge on good references.

Bargain for outplacement services--anything from counseling to an office and a phone for job hunting. However, it may be more valuable to ask for cash in lieu of the service and target that cash for outside professional services and your own job hunting.

Review any non-compete clauses with an attorney before signing anything.

Maintain health insurance. Incurring major medical bills without insurance would be financially disastrous. Consider these options:

  • See if your former employer will continue coverage for you.
  • Convert benefits under the employer's group plan to coverage under an individual policy.
  • Switch to a working spouse's plan.
  • Obtain regular private coverage.
  • Continue employer group coverage through COBRA--a federal program that may allow you to continue group-plan coverage for up to 18 months and in some situations as long as 36 months. However, you must pay the full premiums, and often a small administrative fee. You may find it less expensive to but a short term health plan or high-deductible catastrophic policy on your own.

Continue life and disability insurance. You may be able to convert a group term life insurance or disability policy at work to individual coverage. You'll have to pay the premiums but it's important to continue these types of insurance. Conversion is especially useful for disability, because you won't be able to get it on your own without a job.

Develop an emergency spending plan. Establish a spending plan or revise an existing plan.

Start with sources of income. What can you realistically count on for the coming months? Sources might include severance pay, unemployment benefits (which are taxable), funds from a cash emergency account, a working spouse's income, or perhaps temporary work.

Consider taking early Social Security benefits if you are 62 or older. However, first visit a financial planner to determine if this is the best financial move, given your individual situation.

Do you have mortgage unemployment insurance that might cover house payments for the next six months, or credit card insurance that will make payments while you're laid off?

Can you rent out a room in your home or take in a roommate? Or more drastically, move in with relatives or a friend and rent out your home or sublet your apartment, if the lease allows that.

Avoid dipping into your retirement funds. A job loss is usually temporary, while your eventual retirement may last 20 or even 30 years. Pulling out tax-deferred funds to pay for today's bills is shortsighted for several reasons unless you've exhausted all reasonable alternatives. First, you're losing the opportunity to earn tax-deferred money on withdrawn funds. Furthermore, you probably won't end up with as much cash as you might think because you'll need to pay income taxes on the withdrawal, and possibly a ten percent penalty tax if you're younger than 59 1/2. Taxpayers in higher tax brackets could lose as much as four to five dollars on taxes and penalties out of every ten dollars withdrawn.

List expenses. List expenses in order of priority: mortgage or rent, groceries, utilities, car payments, transportation, insurance premiums, clothing and so on, down to the least important discretionary items. Don't forget to include expenses such as resume preparation, job hunting transportation., education or retraining, and so on. On the other hand, you may be able to temporarily reduce some expenses such as childcare and transportation because you're home.

Subtract expenses from your income. If you still need to cut more to balance expenses with income, consider such strategies as deferring any major purchases you were planning, refinancing your mortgage, shopping for less expensive insurance premiums, reducing eating out, swapping child care services with friends, and talking to creditors about delaying or stretching out payments.

Reduce or stop contributions to retirement plans temporarily, if absolutely necessary, but do not withdraw funds already in your retirement accounts.

Talk to your family. Tell any children or other family members who depend on you financially how the job loss will affect family spending. Ask them for budgeting suggestions. This can help ease anxiety they may have, especially if you have to make a major change such as moving.

Consider government or private assistance. After reducing expenses, you may find that you still don't have enough financial resources for subsistence. You may qualify for help from government or private agencies to tide you over until you find sufficient work.

Make retirement plan decisions. Losing a job will likely force you to make some crucial decisions regarding any retirement account you had at your former employer, such as a 401(k) plan, 403(b) or other qualified plan.

Typically, you will have three choices: cash out, roll the funds over into a new employer's account or into an individual retirement account (IRA), or leave it in your former employer's plan. Check the options with your employer. For example, some plans don't allow participants to leave funds in the plan once employment is terminated. Which action should you take?

  • Cash out: You may need to cash out some or all of our funds to help pay for living expenses during this difficult time. But as noted earlier, taxes and penalties could reduce much of that withdrawal, and you're draining your future nest egg. Another drawback is that you will likely have to pay back, say within 90 days, any outstanding plan loans. If you can't pay it back, you may face income taxes and possibly penalties on the outstanding balance.
  • Roll-it-over: If you can't stay in the existing plan, consider rolling the assets into an IRA to prevent taxation and allow continued tax-deferred earning. You can later roll the assets into a new employer's plan if so desired. Rolling over into an IRA will likely force prompt payback of plan loans. You may also want to roll over if you have any doubts about the financial stability of your former employer.
  • Stay in the plan. You won't be able to contribute to the plan any long, but you won't face any income taxes or penalties on withdrawals. Second, you may not need to immediately pay off any outstanding loans, though most companies will probably still require it. Third, plan assets are protected from creditors under federal law, while not all states fully protect IRA assets from creditors.

Avoid short-term investment decisions. In tough times, the temptation is to become more conservative with investments. Some movement into more liquid assets and cash may be called for. This certainly isn't the time to take fliers on some hot stock in the hopes of generating a quick profit to help make up for lost income.

However, investing should be for the long term, while your unemployment, hopefully, will be only short term. Consequently, try to avoid selling stock in a panic. Often this results in selling during a down market at a loss, and perhaps incurring taxes on capital gains that you can't afford to pay or that eat away at spendable cash. An exception to selling might be your former employer's stock if you are concerned about the company suffering financial reversals or even bankruptcy.

When debt becomes a burden. You may find debts accumulating faster than you can pay them off, particularly if you are out of work for an extended time. Here are some steps to help alleviate that burden:

  • Try to further reduce expenses.
  • Don't accumulate any additional debt if possible. Minimize or avoid using credit cards.
  • Contact creditors to see if you can reduce or defer payments briefly, extend the payment period, or refinance.
  • Sell collateral such as a car or boat to pay off the loan (be sure selling it pays off the debt).
  • Consolidate debts--carefully. Don't transfer lower-interest debt to a higher-interest consolidation loan. Be sure your consolidated payments are smaller than the total of all your payments over the same time period.
  • Consider tapping the equity in your home to pay of credit cards and cars, since the rates may be lower and the interest paid is usually deductible. However, you are putting your home at risk if you can't pay back the loan.
  • Work with a credit counseling service. They may be able to work with your creditors if you can't.
  • Avoid filing for bankruptcy. Filing for bankruptcy should be viewed as a last resort. Beyond the emotional issues of filing, it will stain your credit for years to come. Exhaust all other alternatives first.

See a financial planner. A qualified financial planner such as a CFP professional, can help you assess your unemployment situation, suggest strategies for conserving your financial resources, and perhaps most importantly, help you avoid costly mistakes that could harm your personal finances and your ability to find a good job.

Source: The Financial Planning Association, "How to Survive Financially after a Job Loss," 2004.

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Preparedness Quotes

"When faced with the choice to buy, consume, or engage in worldly things and activities, we all need to learn to say to one another, 'We can’t afford it, even though we want it!' or 'We can afford it, but we don’t need it—and we really don’t even want it!'" - Elder Robert D. Hales, April 2009 General Conference

"Many areas of the world have experienced difficult economic times. Businesses have failed, jobs have been lost, and investments have been jeopardized. We must make certain that those for whom we share responsibility do not go hungry or unclothed or unsheltered. When the priesthood of this Church works together as one in meeting these vexing conditions, near miracles take place.

"We urge all Latter-day Saints to be prudent in their planning, to be conservative in their living, and to avoid excessive or unnecessary debt."
- President Thomas S. Monson, October 2008 Priesthood Session, General Conference

"Avoid the philosophy that yesterday's luxuries have become today's necessities. They aren't necessities until we make them so. Many enter into long-term debt only to find that changes occur; people become ill or incapacitated, companies fail or downsize, jobs are lost, natural disasters befall us. For many reasons, payments on large amounts of debt can no longer be made. Our debt becomes as a Damocles sword hanging over our heads and threatening to destroy us."
- President Thomas S. Monson, April 2006 General Conference

“We have built grain storage and storehouses and stocked them with the necessities of life in the event of a disaster. But the real storehouse is the family storeroom. In words of revelation the Lord has said, ‘Organize yourselves; prepare every needful thing’ (D&C 109:8.)”
President Gordon B. Hinckley

"We need to make both temporal and spiritual preparation for the events prophesied at the time of the Second Coming. And the preparation most likely to be neglected is the one less visible and more difficult--the spiritual. A 72-hour kit of temporal supplies may prove valuable for earthly challenges, but, as the foolish virgins learned to their sorrow, a 24-hour kit of spiritual preparation is of greater and more enduring value.

"We are living in the prophesied time 'when peace shall be taken from the earth' (D&C 1:35,) when 'all things shall be in commotion' and 'men's hearts shall fail them' (D&C 88:91.) There are many temporal causes of commotion, including wars and natural disasters, but an even greater cause of current 'commotion' is spiritual." Elder Dallin H. Oaks

“Every father and mother are the family’s store keepers. They should store whatever their family would like to have in case of an emergency…(and) God will sustain us through our trials.” President James E. Faust

“We live in a most exciting and challenging period in human history. As technology sweeps through every facet of our lives, changes are occurring so rapidly that it can be difficult for us to keep our lives in balance. To maintain some semblance of stability in our lives, it is essential that we plan for our future. I believe it is time, and perhaps with some urgency, to review the counsel we have received in dealing with our personal and family preparedness. We want to be found with oil in our lamps sufficient to endure to the end.”- Elder L. Tom Perry, Ensign, Nov. 1995

"Many more people could ride out the storm-tossed waves in their economic lives if they had their year's supply of food. . . and were debt-free. Today we find that many have followed this counsel in reverse: they have at least a year's supply of debt and are food free." President Thomas S. Monson

"Just as it is important to prepare ourselves spiritually, we must also prepare ourselves for our temporal needs. … We have been instructed for years to follow at least four requirements in preparing for that which is to come.

“First, gain an adequate education. Learn a trade or a profession to enable you to obtain steady employment that will provide remuneration sufficient to care for yourself and your family. …

“Second, live strictly within your income and save something for a rainy day. Incorporate in your lives the discipline of budgeting that which the Lord has blessed you with. As regularly as you pay your tithing, set aside an amount needed for future family requirements. …

“Third, avoid excessive debt. Necessary debt should be incurred only after careful, thoughtful prayer and after obtaining the best possible advice. We need the discipline to stay well within our ability to pay. …

“Fourth, acquire and store a reserve of food and supplies that will sustain life [if local laws permit such storage]. Obtain clothing and build a savings account on a sensible, well-planned basis that can serve well in times of emergency. As long as I can remember, we have been taught to prepare for the future and to obtain a year’s supply of necessities. I would guess that the years of plenty have almost universally caused us to set aside this counsel. I believe the time to disregard this counsel is over. With events in the world today, it must be considered with all seriousness.” - Elder L. Tom Perry, October 1995 General Conference

“Maintain a year's supply. The Lord has urged that his people save for the rainy days, prepare for the difficult times, and put away for emergencies, a year's supply or more of bare necessities so that when comes the flood, the earthquake, the famine, the hurricane, the storms of life, our families can be sustained through the dark days. How many of us have complied with this? We strive with the Lord, finding many excuses: We do not have room for storage. The food spoils. We do not have the funds to do it. We do not like these common foods. It is not needed -- there will always be someone to help in trouble. The government will come to the rescue. And some intend to obey but procrastinate.” - The Teachings of Spencer W. Kimball, p.375

“All too often a family's spending is governed more by their yearning than by their earning. They somehow believe that their life will be better if they surround themselves with an abundance of things. All too often all they are left with is avoidable anxiety and distress” - Elder Joseph B. Wirthlin

"Be prepared in all things against the day when tribulations and desolations are sent forth upon the wicked." D&C 29:8

"Too often we bask in our comfortable complacency and rationalize that the ravages of war, economic disaster, famine, and earthquake cannot happen here. Those who believe this are either not aquainted with the revelations of the Lord, or they do not believe them." President Ezra Taft Benson

"Fear not little flock; do good; let earth and hell combine against you, for if ye are built upon my rock, they cannot prevail. . .Look unto me in every thought; doubt not, fear not." D&C 6:34, 36

"I believe that the Ten Virgins represent the people of the Church of Jesus Christ. . . They (five foolish) had the saving, exalting gospel, but it had not been made the center of their lives. They knew the way but gave only a small measure of loyalty and devotion.

"The foolish asked the others to share their oil, but spiritual preparedness cannot be shared in an instant. . . . This was not selfishness or unkindness. The kind of oil that is needed to illuminate the way and light up the darkness is not shareable. . . . In our lives the oil of preparedness is accumulated drop by drop in righteous living." - President Spencer W. Kimball

“We encourage families to have on hand this year’s supply; we say it over and over and over and repeat over and over the scripture of the Lord where he says, “Why call ye me, Lord, Lord and do not the things which I say?” How empty it is as they put their spirituality, so-called, into action and call him by his important names, but fail to do the things which he says." - President Spencer W. Kimball"/>


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