Tough Times Series: Steps Before, During Layoff Make It Easier to Cope

Mortgage interest rates that started out low are re-setting at levels that already have driven millions of homeowners into foreclosure. Gas prices hit all-time highs this year. And the United States Agriculture Department predicts food prices will increase 3% in 2008, on top of a 4% increase last year.

As the economy struggles, consumers and companies alike are looking for ways to cut costs. For some employers that means cutting jobs. While a layoff by any euphemism�downsizing, rightsizing, or redundancy management�is equally difficult, there are ways to plan for and manage unemployment that may make it seem less like your ship is sinking and more like you've simply changed course.

Take stock of resources, plug leaks

If you're still employed but feeling uneasy about your future (see the sidebar for signs that a layoff may be looming), now is the time to get your finances in order.

Start by assessing your liquid savings�those funds you could tap quickly and easily if your paycheck suddenly stopped coming. If there's not enough there to get you through months of unemployment, start beefing it up. That might mean forgoing restaurant meals, weekend getaways, and other nonessential purchases and redirecting those dollars to your emergency fund.

Nancy Collamer of New Greenwich, Conn. wrote the Layoff Survival Guide when her own family was faced with a job loss. One of the things Collamer recommends is that homeowners who don't already have a home equity line of credit open one while they still are employed (and can qualify) so it's there if they need it to make ends meet. Treat this as an emergency reserve only. Talk to a credit union loan officer for guidance.

Paying off debt is a smart goal no matter what your job situation. Get rid of credit card balances, car loans, and other short-term debt as quickly as possible.

"You'll definitely save yourself a lot of stress by being fiscally responsible" in the face of a possible layoff, says Collamer. She recommends that anyone who suspects a job loss also avoid new, long-term financial commitments�no major home renovations or luxury car purchases.

Set spending priorities

If you lose your job and you can see that your available resources will not be enough to cover all your essential expenses, identify your priorities.

Todd Mark, vice president of education for Consumer Credit Counseling Service (CCCS) of Greater Dallas, says keeping up with your rent or mortgage payments should be your top priority. Second most important is making your car payments. Third is paying essential, basic utilities�in other words, not premium TV channels. And next on the list is food and essential insurance coverage. If necessary, pay insurance premiums monthly rather than making a single large payment for multiple months or the whole year.

"Everything else falls by the wayside, including debt," says Mark. "I'm not saying not to pay your bills, but if you can't pay the first five on the priority list, then you can't justify credit card payments."

If there is money to spare, however, Mark says consumers should try to make at least the minimum monthly payments on credit cards because missed payments can generate higher interest rates and fees, and damage your credit. This, in turn, can affect your ability to get a job if an employer does a background check.

A 401(k) or traditional IRA (individual retirement account) is another potential source of income, but withdrawing funds should be seen only as a last resort. An early withdrawal (before age 59�) most likely will generate both a tax bill and a 10% penalty.

Also, if you withdraw money from a retirement savings account, such as an IRA, you lose the benefit of compounding on the dollars you've withdrawn. You can lose thousands of dollars�or more�over the years that the money could be compounding.

If you're unemployed, or challenged by rising prices and declining home values, someone at the credit union can help you identify options, set expense priorities, deal with debt, and plan for the future. Or, you can locate a CCCS counselor at a nonprofit agency by calling 800-388-CCCS (800-388-2227) or visiting the NFCC Web site.

Don't leave your most valuable resource behind

Experts agree that the best way to find a new job is through personal and professional contacts. Yet, in many cases, laid-off workers are cut off from company computers immediately and can't retrieve the information that would help them get back on their feet.

"People who keep [their contact list, personal files, and work samples] on a computer at work need to have it available," says Collamer. "That's smart whether you're getting laid off or not."

Todd Mark agrees that job seekers will have a much easier time of it if they keep a copy of their contact database and personal files at home and update it regularly. He also recommends updating your r�sum� every year around tax time�tying it to a specific annual event makes the task easier to remember.

"Ask yourself, 'What have I done in the last year?,' " says Mark. "You don't want to have to recreate years of accomplishments in the midst of chaos."

Crucial steps in first few days

Collamer advises every laid-off worker to file for unemployment benefits immediately because it can take a few weeks before your first check arrives.

According to the U.S. Labor Department , unemployment benefits are available to "workers who become unemployed through no fault of their own, and meet certain other eligibility requirements" that vary from state to state. Benefits typically last up to 26 weeks and pay about half what you earned as an employee. To file a claim, contact your State Unemployment Insurance agency. In some states, you can file a claim online or by phone.

Another "must do" for the newly unemployed is to review your severance, or separation, package. It most likely will be made up of many pieces including, in some cases, severance pay, accrued vacation pay, and outplacement services. It's important that you understand what you're getting and if there is anything you need to do to take advantage of what's offered. You also should determine if you believe the package is fair and gauge if there's room for negotiation.

If your company employs 20 or more workers, you'll have the option to continue your health insurance benefits for, typically, up to 18 months under COBRA (Consolidated Omnibus Budget Reconciliation Act). The catch: You'll have to pay the full premium, plus a small administrative charge, yourself. In many cases, health insurance will be much more expensive than it was when you were an employee. If you're married, coverage under your spouse's employer-sponsored medical plan is likely to be more affordable. Loss of coverage is a qualifying event to enroll in a spouse's health insurance plan midyear. You must enroll within 30 days of a qualifying event.

You have 60 days from the date you were laid off to elect a COBRA extension. You will be charged retroactively for the period between your first day of unemployment and the day you started COBRA. The Labor Department provides detailed information about COBRA.

If you have a 401(k) or similar retirement savings plan and the balance is less than $5,000, the plan may provide for an immediate distribution of benefits when you are laid off, says Dennis Zuehlke, compliance manager for CUNA Mutual Group in Madison, Wis.

Zuehlke explains that the plan must give you an election period in which to choose either a direct rollover to a traditional IRA or a distribution in cash, and the plan is required to disclose these options to you. If you receive such a notice, make sure to make your election within the allowed time. If you elect to take a cash distribution, the plan must withhold 20% for federal income tax withholding, so you will only receive 80% of the cash immediately (although you may get a tax refund of the other 20% next year). If you are in doubt about what to do, tell the plan administrator to move the money into an IRA from which you can make penalty-free withdrawals.

Zuehlke says the tax results are the same whether you receive cash from your employer's plan or you withdraw the same amount from the IRA that receives the direct rollover from the plan, except there is no mandatory withholding for the IRA withdrawal. Moving the money to your IRA gives you more time to decide whether you need this cash to pay your priority bills.

If your account balance is more than $5,000, you may be able to leave it where it is indefinitely. That may be the best option if you have a loan out on your 401(k) and can't repay it immediately. If you move it while you still owe money, the IRS (Internal Revenue Service) will treat the loan balance as an early distribution, subject to tax and a penalty. If you don't have a loan out, or after you repay it, you have the option of rolling the account balance over to an IRA or to your new employer's plan, if that is allowed.

If you're in a defined-benefit plan (a traditional pension plan), you most likely will have to leave the benefits with the retirement plan until you become eligible to receive them. Ask for a benefits statement, which will tell you if your pension is vested and when you're eligible to receive it. Continue to update your contact information with the plan administrator after you are laid off.

If you have vested stock options you haven't exercised yet, ask human resources how long you have to make the purchase.

If your separation package includes outplacement and career transition services, take advantage of them. Outplacement services may include career counseling, r�sum� development, interview coaching, and job search assistance.

Before you go, ask for a reference letter. Many companies make it a policy not to provide a recommendation, but it doesn't hurt to ask. At the very least, you may get a written confirmation of employment.

Collamer recalls the lessons she and her family learned during those months of unemployment. One thing she realized during that time is that while you may not be able to control specific events, you do have more control over your life than you might realize. Having a purpose and a plan of action every day, she says, will make a layoff infinitely easier to manage.

Switching to a lighter note, Collamer encourages laid-off workers to make an effort to enjoy this time.

"A lot of people work for 25 years and never get a chance to get away from the grind," she says. "This could be an opportunity to re-evaluate, make changes ... or just have some fun on a Friday afternoon."

Published May 26, 2008