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So you've lost your job...
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July 17, 2001: 7:15 a.m. ET
How you can manage your assets to weather the storm of unemployment
By Bettina Teodoro
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NEW YORK (CNNfn) - Layoffs, it seems, have become a daily occurrence as corporate America struggles with slumping sales and reduced profits.
According to outplacement firm Challenger Gray & Christmas Inc., U.S. companies cut 124,852 jobs in June alone, bringing the total number of job losses this year to 777,362. This June total was an increase of 624 percent from the number of jobs cut in the year-ago month.
Losing your job can be a tremendous shock to your financial system. But rather than panic, experts say you should evaluate immediately your monetary situation.
First, take an inventory of expenses. Debby Vinyard, a certified financial planner (CFP) with Vinyard Financial Planning & Associates in Marion, Ill., says the newly-unemployed need to "look at what they are spending month-to-month and divide that between what their needs are and what their wants are."
Then, says Vinyard, they should devise a plan to reduce those expenses. While food, housing and health care must remain priorities, she suggests eliminating non-necessities like dining out and club memberships.
Financial planners warn against using credit cards as emergency sources of funding.
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 HEALTH CARE
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If you get a severance package, your health benefits should extend through the severance period. Otherwise, under federal legislation known as COBRA, you and your spouse and dependent children can continue your benefits – at your own expense – for 18 months. You also may be able to withdraw from your IRA, tax-free, to pay health insurance premiums while unemployed.
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"This is not the time to turn to credit cards. That is what I have seen more than anything, folks get into trouble and use their credit cards as cash," Vinyard said.
Instead, planners recommend paying down credit card debt or approaching card issuers for payment relief, perhaps paying interest only instead of principal and interest.
They also suggest assessing the stock portfolio to see if it is too aggressive.
"Being too aggressive is relative," says John Blankinship, a CFP with Blankinship & Associates in Del Mar, Calif. "Though it may have been okay before you were laid off, you may not want to be exposed to that kind of risk today, because you don't know how long it's going to be before you get an assured income stream back."
Selling out
But nipping and tucking may not be enough – especially if it takes you longer than expected to find a new job.
If you must start liquidating assets, Mari Adam, a CFP with Adam Financial Associates in Boca Raton, Fla., says to sell first anything from a personal non-retirement account that has retained its value, such as bonds and blue-chip funds.
Vinyard also suggests borrowing from your cash value personal life insurance policy. A loan against the cash value of a permanent life insurance policy (term policies do not have cash values) is a non-taxable event, unless you ultimately cash out your policy without having repaid the loan.
"It is one of the best sources of immediate cash," says Vinyard. "It's borrowing from yourself."
Another potential source of cash is your 401(k) retirement plan, although experts say you should do this only as a last resort.
On termination of employment, your 401(k) can remain with your former employer (if you have over $5,000 in the plan) or be rolled into a 401(k) with your new employer or into an individual retirement account (IRA).
For some, particularly those without new employment or with a small 401(k), the temptation to cash in the 401(k) is strong.
However, if you are under 59-1/2 years old (55 in some cases), your withdrawal amount will be subject to ordinary income tax and a 10 percent early withdrawal penalty. Once those deductions are made, Adam says, "There's nothing left!"
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TAX TIP
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According to CFP Mari Adam, if you decide to roll your 401(k) into an IRA, make sure your employer sends the money directly to your new custodian. If you cash a check payable to you, 20 percent in taxes will be withheld immediately – even if you intend to deposit the funds into an IRA.
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Therefore, Adam recommends flipping your 401(k) into a traditional IRA, so your money will continue to grow tax-deferred. However, IRAs allow tax-free withdrawals only in certain circumstances – and financial hardship is not one of them.
Roth IRAs are more user-friendly. These retirement tools, which allow qualified investors to deposit up to $2,000 after-tax per year, enable investors to withdraw the principal of their account, tax-free.
A final option is to take an annuity from your IRA, which is a lump sum payment made at regular intervals and calculated based on your age and account balance. The payment is not subject to any penalty, but is subject to income tax.
While you can opt for an annuity at any age, Adam says this option is more suitable for older individuals or those with hefty IRAs, because an annuitant must continue to receive payments until he or she is 59-1/2 years old or for 5 years, whichever is longer.
Adam says long-term investors should be more afraid of the tax consequences of liquidating a retirement plan than the prospect of incurring capital gains tax.
"Even if you pay capital gains, it's 20 percent or even 10 percent, but by definition it's always lower than the tax rate on taking money out of an IRA," Adam says. "I always tell people, it's 20 percent max if you pay gains, but any money that comes out of an IRA or 401(k) is taxed at probably 28 percent or more."
Anytime you tap your retirement plan, of course, you also must remember that money withdrawn will no longer be available to compound, which can cost your nest egg dearly.
Looking ahead
While it is not always easy to forecast a layoff, everyone can benefit from some advance planning. First and foremost, planners say you should set aside between 3 and 6 months worth of living expenses.
Also, if you have an outstanding loan against your 401(k), you should pay it off as quickly as possible. If you are laid off, Adam says, your company will want that loan repaid in full, immediately. Otherwise, they will treat the loan as a distribution, making it subject to income tax and the penalty.
According to Marilyn Steinmetz, a CFP with Money Matters in West Hartford, Conn., people should be looking constantly to adjust their portfolio to current market conditions. They also should take advantage of lower interest rates – on credit cards, for instance – to reduce their debt burden.
"If you carry balances on your credit cards, you want a card that has an 8 percent or 9 percent interest rate," she says. "You want to get rid of the 18 percent cards."
Finally, Steinmetz recommends reaping the benefits of employment while you still can. Getting a home equity line of credit – likely impossible once unemployed – may be an invaluable safety measure.
"I tell a lot of people, if they think [a layoff] is going to come up in the future, to get the line of credit on the house now," she says. "It doesn't mean you have to borrow from it. It means it's in place for when you need it." 
* Disclaimer
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