Key steps to take when laid off or furloughed
The number of workers who have been laid off, furloughed or experienced salary cuts this year is at record highs. If you find yourself in this situation, there are some key steps you can take to help bridge your financial gap.
The first and most obvious step is to cut spending wherever you can. Canceling streaming services, preparing your own meals at home and general frugalness can help you stretch your reserves several more months.
Also, make smart decisions with your debt. Make your minimum payments if at all possible, but don't pay anything extra at this point. If you have student loans, contact your lender and see if you qualify for any deferment or forbearance plans. And if you can't make your minimum payments, contact your lenders for options and get immediate help from a Certified Financial Planner professional.
Health insurance is another challenge if you've lost your position altogether. You are likely eligible to keep your current group health plan under COBRA for 18 months. However, it may be less expensive to join your spouse's plan or purchase coverage on your own through the Healthcare.gov website. Be sure to get a second opinion and explore all of your options.
Besides cutting expense, you may need to seek additional sources of funds to help cover your shortfall. If so, this is an important time to review your portfolio allocation. You may need to change the mix of your investments based on the amount of your emergency funds and the expected length of unemployment. After the financial crisis of 2008, some older riffed employees even needed to consider their retirement options.
And if you need to access some of your retirement savings, one bit of good news is that it has never been easier. The recent CARES Act passed in response to the COVID-19 crisis has temporarily changed many of the normal rules for accessing your retirement accounts early.
First, you can withdraw up to a combined $100,000 from all of your IRAs and 401ks without an early withdrawal penalty. Normally a 10% penalty would apply so this could save you up to $10,000 in penalties.
Second, you do not have to pay all of the taxes on the withdrawals in 2020. Rather, you can spread the income from the withdrawals over three years. This can help improve your cash flow during while your income has dropped.
Third, any of the withdrawals you pay back before the end of 2022 will not be subject to income tax at all. This may require you to file an amended return or two, but it could also help you defer thousands of dollars in additional taxes.
But before you dip into your retirement savings, be sure to explore all other options for emergency cash. This could include drawing on a home equity line of credit, taking out any voluntary after-tax savings contributions from work, exercising stock options or borrowing against the cash value of a life insurance policy.
And, of course, you are encouraged to seek the help of a Certified Financial Planner professional. This is someone trained to look at your entire financial picture and who can help you work through this check list and help you understand the pros and cons of your specific options. Don't let mistakes made during a crisis do any long-term harm or permanent damage to your finances.
• John Bever, CFP, and Jim Uren, CFP, are financial advisors with Phase 3 Advisory Services in Buffalo Grove.