For nearly everyone, a paycheck is the linchpin holding together their financial security. No wonder, then, that the layoffs that have been rolling through corporate America have shaken those who’ve had that security yanked from under them, and have worried others who fear they may be next.
The good news is that experts say the agony of a job loss is likely to quickly yield to the gratification of a new offer. And, in the interim, there are ways to cope, even without that seemingly essential paycheck.
Here’s a step-by-step survival strategy.
– Severance and unemployment insurance help bridge the gap. When it announces a layoff, a company will have already crafted a severance package. The formula varies with each company, says Walter Polsky, chairman of Cambridge Human Resource Corp., a Chicago outplacement firm.
Although policies vary, Polsky acknowledges that many companies give two to four weeks of pay as an initial package, with an additional week of severance pay for each year of service. High-level executives tend to receive separate, richer packages. Some companies give severance in one lump sum, and some stretch payments over time.
When there’s a large-scale restructuring, companies must institute an overarching policy that’s applied equally to all workers, says Polsky. Only in very small-scale layoffs — for instance, when an isolated department is eliminated — do workers have the ability to bargain for severance terms, says Polsky.
Still, midlevel managers and above typicallyshould take in the detailed contract they receive outlining the terms of their severance to an attorney, says Stephen Basinski, vice president and general manager of Spherion, a Chicago outplacement company.
“Anyone who gets a separation package wants to make sure of three things,” agrees Eugene Jacobs, an attorney with Seyfarth Shaw in Chicago. “You want to fully understand what you are getting, and you want to make sure what you are getting is what you are entitled to receive since each company generally has its own culture and terms about what it gives to employees. And finally, you want to make sure you are not giving up any legal rights. Some executives, for instance, are asked to sign a contract where they give up the ability to make a later charge against the company for age discrimination.”
Residents of Illinois have the benefit of being able to collect unemployment insurance even when they’re receiving severance payments.
“It doesn’t matter how much you’re getting in severance, in Illinois you are also entitled to unemployment,” says Hardy Freeman of the outplacement firm Hardy Freeman & Associates, a division of Tacit, Inc. in Chicago. “But if you also have vacation pay coming, one is deemed by the state to be employed until the vacation pay is used up.”
“People should go to unemployment immediately,” says Elaine Emch, a Chicago insurance communications professional who was laid off at the end of the year. “A lot of people don’t think they’ll qualify, but most do. If you don’t go for it right away, you’re just forfeiting that money.”
– A realistic assessment is the basis of a survival plan. Even though hundreds of people are usually included in a single layoff, it’s hard not to take a pink slip as a personal insult. A range of emotions, from guilt to rage, typically sets in.
When a semblance of normalcy returns, pull out a pencil, paper, your financial records and a calculator. Then, says Doug Brown, a financial planner at Ernst & Young in Chicago, “the first thing is to project the income sources you will have.” Tally up all necessary expenses and match them against your severance and unemployment.
“That may not be enough to get you through for long, and then you’ll have to consider what savings and investments you can touch.”
If you’ve received a lump-sum severance, notes Julie Alcala, a manager in private client services at Arthur Andersen in Chicago, you’ll want to place that money in a liquid vehicle that carries little risk, like a money market fund.
The biggest fear for laid-off workers is the unkown: how long they’ll be out of work. Indeed, it’s nearly impossible to plan how long severance and savings will last without knowing the duration of the paycheck drought. Outplacement experts say the typical worker should be able to find a new, comparable position within three to four months. “There’s been a lot of layoffs at large companies, but smaller companies are still hiring,” says Polsky.
Those who project a cash crunch who are also homeowners may want to take out an equity loan, says Alcala. Although lenders don’t often extend money to someone unemployed, many laid-off workers may still qualify for an equity loan if their spouse works, says Alcala. If you think you may be laid off, it can be a good move to open an equity line of credit but not draw on it unless you need money later.
– A budget needs room for small pleasures. Alecia Swasy, who studied the workers laid off by Eastman Kodak several years ago in Rochester, N.Y., for her book “Changing Focus,” says that, initially, people have a reluctance to follow a budget. “There’s denial and a period of shock, but then reality sets in pretty quickly.”
You’ll want to cut unnecessary expenses and trim other costs to stretch your money as long as possible, but it may be counterproductive to go on an austerity budget if such a measure would deflate your ego or otherwise detract from the job search.
Severance pay helps many of today’s laid-off workers feel confident enough to maintain a normal lifestyle. John Rupley, an insurance broker from Northbrook, says that when he received an 11-month severance package he changed little except “we didn’t go out and buy a new car.” After three months, Rupley landed a new position.
– Keeping medical insurance is a necessity. Especially if laid-off workers receive severance payments over time, instead of in one lump sum, their former employer is likely to continue medical coverage along with the severance checks, says Polsky.
Anytime a worker’s coverage stops, notes Doug Brown of Ernst & Young, a federal law known by the acronym COBRA entitles people to continue their former coverage by paying premiums themselves for 18 months.
Health coverage is essential to protect a worker and his family, agree experts. Sometimes, however, households under a real cash squeeze may want to consider options other than continuing the coverage their employer had provided.
“Company costs are high these days, and under COBRA a laid-off worker also pays a 2 percent administrative fee over the premium cost of their employer,” says E. Jean Shamo, a Hilton Head, S.C., fee-only planner who herself was laid off when she worked as a company comptroller in Chicago in the 1980s.
If you have a good health record, notes Shamo, you may be able to find health coverage cheaper from another company, especially if you opt for a policy with a high deductible.
But don’t reject the COBRA opportunity unless you’re sure you can obtain better coverage elsewhere, notes Brown, because if you initally reject the COBRA, you can’t come back later and pick it up.
– The honest approach with creditors may help. For those facing the double whammy of limited cash reserves and high credit card bills, there’s nothing to lose and only dollars to gain by calling or writing the card issuers and asking for easier terms during the layoff.
“When people we help are under pressure from credit card companies, we suggest that they write and explain that they lost their job,” says Freeman. “If they promise not to use the card for new purchases, the issuer may let them just make interest payments until they get a new position.”
A similar, honest approach may win some tuition reduction or loan arrangements for families with a child in college. Financial-aid packages for a school year are based upon a family’s previous year’s income, as reflected in their tax return. But if a family experiences a layoff and needs immediate tuition relief, they should contact the financial aid office.
“It’s up to the college, but they might make an arrangement, ” says John Schoultz, director of financial aid at DePaul University.
– Retirement savings are sacrosanct. If a worker has been diligently contributing to a retirement account like a 401(k), it’s tempting to console oneself that there’s also that money in reserve. And while it’s true that the money is there to cover an emergency, it should only be tapped as a last resort, stresses Brown.
That’s because if you’re younger than 59 1/2, federal tax rules stipulate a 10 percent penalty on any money you take out.
Moreover, if money in a 401(k) is ever transferred directly to you, the employer will withhold 20 percent for income taxes. The best strategy is to roll the money over: have it transferred directly into another retirement account at a bank or brokerage. Many companies will also let laid-off workers keep their money in their company 401(k) and transfer it later to their new company.
