Downsizing Is a Fact of Life--Prepare for It : Jobs: Layoffs are an unfortunate reality in today’s corporate America. It’s best not to be caught off guard.
Whether your employer calls them layoffs, downsizing or a strategic work-force reduction program, losing your job can be emotionally and financially devastating unless you’re prepared.
Firings are common, if unhappy, occurrences these days. Corporations continue to shed jobs as they try to shrink, restructure, merge or acquire their way to improved bottom lines. In the first six months of 1995 alone, 212,299 workers lost their jobs, according to Challenger, Gray & Christmas Inc., a Chicago-based outplacement firm that tracks job reductions.
“It’s part of the employment landscape now,” said John Challenger, executive vice president of the firm.
Companies that have cut jobs this year include BellSouth Corp., CNA Financial Corp., Boeing Co., Lockheed Martin Corp., Mobil Corp., Chase Manhattan Corp. and Kmart Corp.
Joining the ranks of the unemployed is hardly conducive to increasing your net worth, so “people need to be prepared financially for the contingency of being laid off,” said Sheryl Spanier, senior vice president at the Strickland Group career management firm in New York.
Even if your company never drops a pink slip in your in-box, you should have set aside “money market funds or other cash equal to three to six months of living expenses,” said Scott Kahan, president of Financial Asset Management Corp., a New York financial planning firm.
The cash will come in handy since finding a job can take six months or more, depending on personal and professional relationships, seniority and career interests.
If your employer does show you the door, you can avoid unnecessary lifestyle changes by putting together a three-month financial plan and reviewing it if you’re not employed in 90 days. “Set up a bare bones budget and stick to it,” said Kahan, “but don’t make all your decisions on day one.”
Along with savings, your transitional budget should account for income from severance pay from your former employer and unemployment insurance from the government. Severance pay arrangements can vary widely depending on your industry or seniority, but payments typically range from one week to one month for each year of service.
And while you may have to swallow some pride to stand in line at the unemployment office, remember that employers have been paying into the unemployment insurance fund on your behalf for as long as you’ve been working. “It’s shocking that people don’t look into collecting unemployment compensation,” said Spanier. “They’ve earned it.”
Unemployment compensation won’t be a king’s ransom, but it can help cushion cash-flow problems. With some variation from region to region, you can expect the program will stick close to New York state’s formula of 50% of pretax weekly salary with a maximum weekly payment of $300. Keep in mind that unemployment benefits only last 26 weeks and are taxable.
The second part of your budget should account for those expenses that will constantly drain cash, including mortgage or rent, food, children’s education, utilities and taxes.
Just as crucial is a fixed expense that’s often overlooked: Health insurance.
As a result of a law passed by Congress called the Consolidated Omnibus Budget Reconciliation Act, or COBRA, your employer is required to pass its discounted group rate along to you for 18 months after your termination. You’ll pay about $2,500 per year to continue health coverage for a family of four at your company’s group rate, financial planners said.
That sounds like a hefty bill, and it is, especially since you used to pay only 10% to 20% of that when your company picked up the rest. It beats the alternative, though, of buying insurance on your own at an annual cost of $7,000 or more.
The good news about increased medical costs of any kind is that they qualify as tax deductions when--combined with certain other miscellaneous deductions--they exceed 2% of your adjusted gross income for the year.
Job search expenses such as commuting costs and outplacement agency fees fall into the same miscellaneous category, raising your total deductions at a time when your income is likely to be lower. So, keep scrupulous records to save on taxes come April.
Even better than writing off job-hunt expenses is letting your former employer pay for them outright. Career counselors urge terminated workers to negotiate for office space, telephone service and secretarial support at the time of their firing.
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While some expenses are fixed, cutting back on nonessential entertainment such as vacations and dining out will conserve cash. But don’t overdo it. New clothes might turn an interview into a job, and memberships in golf, tennis or health clubs can offer a chance for professional networking.
“I tell people not to punish themselves,” Spanier said. “Many people adopt an attitude of impoverishment that negatively impacts on their professional image.”
If cash gets tight, resist dipping into retirement savings. Fired employees usually transfer savings in company 401(k) or profit sharing plans into individual retirement accounts, or IRAs. If you’re under 59 1/2, you could lose 30% to 50% of your savings to penalties and taxes by withdrawing funds from your IRA, according to Internal Revenue Service rules.
Borrowing may make more sense, but consider borrowing from yourself by taking out a loan against the equity you’ve built up in your home. These loans are usually cheaper than lines of credit from banks or credit cards, which can cost anywhere from 10% to 20%.
Surviving a firing is as much about mental toughness as it is about dollars and cents, said Ronald Rutherford, chief executive officer of Rutherford Asset Planning Inc., a New York money management firm. “Attitude is everything in these circumstances,” he said. “People who are determined to survive will make the necessary adjustments.”
