Partly that’s bravado Partly it’s learning to live in a world where even high-profit companies “down-size” by letting people go. The traditional cushion against job loss is three months’ living expenses, held in cash or other liquid assets. But. the more you earn, the longer a job hunt is likely to take.
Your layoff budget: If you’re laid off, the first thing you’ll need is a bare-bones budget. List the expenses: mortgage, rent, utilities, insurance, car loan, food, gasoline, job-hunting costs. Pay only these; put other bills in a box marked “later.” Then add up your income: from spouse’s paycheck, interest on savings, unemployment new Establish the gap, if any, between your income and the basic bills.
Next, total your ready cash reserves–your severance pay, bank accounts and liquid investments like stocks and mutual funds (but not your retirement-savings fund; that comes in later). Take a fast loan against your home-equity line to give yourself some extra cash. Use some of this reserve each month to fill the gaps in your layoff budget. Your goal is to cover basic expenses for at least nine months while you hunt for work.
Reduce other expenses that look immutable but might not be. The day-care center might let you coast for a couple of months. The orthodontist may continue to see your children on your promise to pay all back bills plus interest.
Do not pay what you can’t afford to pay! That sounds obvious, but it’s a rule of survival that laid-off workers often violate. Make no payments on postponable bills, including credit-card bills, if doing so means that you’ll run out of money within a few months. Forget about hurting your credit rating; it’s repairable. What matters more is keeping the lights on, the telephone working, gas in the car and food on the table.
For every bill in the “later” box, write to the head of the credit department. Say that you’ve lost your job, cannot pay but will very soon. Send monthly $10 good-faith payments. This strategy won’t work forever, but it could buy you, say, six months.
Your retirement savings: When you leave a job, you may receive a sizable sum from your tax-deferred 401(k) retirement-savings plan. If you spend that money, you will (1) pay income taxes on it, (2) pay a 10 percent penalty if you’re under age 59 1/2 and (3) lose the precious tax shelter that allows the earnings to compound tax-deferred. To save all these taxes, roll the money into an Individual Retirement Account. Use a separate IRA, not one you have already, advises George Barbee, executive director of personal financial services at Price Waterhouse. As long as you segregate this money, you may be able to roll it back into a 401(k) at the next company you join. A modest $3,500 payout may not seem worth it. But at 8 percent interest it grows to $35,200 in 30 years without your having to lift a finger.
What if you’re forced to spend your retirement savings in order to meet some current bills? Prepare for this by rolling your 401(k) into an IRA invested in a money-market mutual fund or bank money-market deposit account. Dip into it only if your other savings run dry. You’ll pay taxes and penalties on the money taken out. But as soon as you find work, you can stop your withdrawals and protect any IRA money left.
Staying insured: If most of your life insurance came from your employer, and you have a family to protect, buy an inexpensive term policy. You can’t afford to go without.
For health insurance, you have some choices. If you’re married, the family maybe covered by your spouse’s plan. If your company employs 20 people or more, you can stay in the group plan, usually at your expense for up to 18 months (you have a 60-day deadline for signing up). Smaller-company employees can often convert from the group plan to an individual policy without passing a health exam, although the policy won’t be cheap. If you’re insurable, ask an insurance agent to find you a new three- or six-month policy. Or buy Blue Cross / Blue Shield, pay by the quarter and drop the policy when you join a new group plan.
Handling investments: Any retirement-savings fund should be heavily invested in stocks. But if you quit your 401(k) plan, your stocks are typically cashed out, says Maryann Laketek of the consulting firm Hewitt Associates in Chicago. In this market, that means realizing losses. If you’d rather not, you could leave your money in the plan for the company to manage.
I say, don’t do it. Take the money and run. First, you already have those losses, whether you recognize them or not. So taking the cash doesn’t change your net worth. Second, if you don’t remove your 401(k) funds now, they might be tied up until you’re 65. You couldn’t retrieve the money later, if you needed it to live on. Furthermore, the newly jobless are better off with cash. Every dime of capital is precious. You cannot take the risk of losing it. Redeploy your remaining savings into stocks only when your income is secure again.
If you’re restructured out of a job, you’re-apt to panic. You can’t imagine living on less. This very month, your cat will starve, the bank will foreclose and your children will have to sleep on a grate. But take it from the previously fired: a family with savings can eke out a year–time enough to begin again.
