The specter of rising unemployment raised its ugly head recently when the Department of Labor announced that initial claims for unemployment insurance hit a three-year high despite apparent improvements in the national economy.
Economic growth was once a sure signal that more Americans would be collecting regular paychecks, but those days may be gone forever, financial pundits say. Internationalization, increasing technological advances and an industrywide push to watch the bottom line are creating new-and far less permanent- relationships between employers and employees.
In the future, workers are more likely to sell their skills on a per-job basis to a variety of employers than be lifetime employees of a particular company as was common in the past, adds Jack Kyser, chief economist with the Economic Development Council of Los Angeles.
On the bright side, the shift allows for more flexibility- “liberation” from the 9-to-5 workday. But it also requires a new type of financial planning.
Whether you call it a “catastrophe plan” or a “liberation plan,” all workers should have a formula for handling their finances in the event they’re cast adrift from the 9-to-5 world, says Margie Mullen, principal of Mullen Advisory, a Los Angeles-based financial-planning firm.
The first step is to create a bare-bones budget, says Mullen. That requires taking a look at exactly how much you spend each month on essentials-keeping a roof over your head and food on the table, for example. While this budget should exclude entertainment expenditures and other frills that may be in your ordinary spending plan, it should allow a little “slush” for things like unexpected medical bills.
Your second step should be to consider a worst-case income scenario. If you were laid off, how much would you collect in unemployment insurance? How much could you reasonably expect to earn from temporary, free-lance or independent contracting work? Do you have income from other sources?
If your income is likely to fall short of necessary expenses, you need to consider the savings, investments and other assets you may have-and be able to cash in-in order to bridge the gap.
Your final step is to formulate a plan to systematically liquidate those assets in the most cost-effective manner possible. Why? While certain assets may be readily available, they may also be relatively costly to tap, planners note.
The most obvious example are funds invested in an employee retirement account, such as a 401(k) plan, at work. Often, companies will give laid-off workers the option of taking their 401(k) funds with them or leaving them on deposit in the company plan. A natural inclination is to take the cash and use it to live on until you get a new job. But that’s usually a costly mistake.
If you fail to put the proceeds from your 401(k) distribution into an IRA account within 60 days, you face income taxes and penalties on the pre-retirement withdrawal. The federal tax penalty alone amounts to 10 percent of the distribution amount. Some states, including California, assess additional penalties. And the entire amount is subject to ordinary income taxes, too.
The bottom line: Between 30 percent and 50 percent of the amount you get is eaten up in taxes.
Instead, individuals should raid simple saving accounts and other so-called “cash” investments, such as money market accounts, money market mutual funds, short-term Treasuries and maturing certificates of deposit.
A second step would be to reduce the risk in your investment portfolio by selling some of the more volatile stocks, bonds or mutual funds when prices are high. Then reinvest the proceeds in shorter term assets that can be sold without a substantial risk of principal loss, Mullen suggests.
If the money you have saved and invested (outside of retirement accounts) is insufficient to tide you over, take a look at your borrowing power on credit cards, Mullen adds. While credit card borrowing is costly, it’s still less expensive than draining your retirement account. But remember you’re borrowing only for a short period-until you get a new job or a lucrative contract assignment-at which time, you’d want to pay off the credit cards as quickly as possible, she says.
Costly and onerous alternatives, such as selling personal assets and depleting retirement savings, should be considered only as a last resort, planners note.
