debt

No job means bare-bones budget

Steve Bucciq_v2.gifDear Debt Adviser,
I have been unemployed since July 2009 and am running out of savings, with no job prospects on the horizon. Does it make sense to withdraw funds from my 401(k) plan to pay off my credits cards, totaling $18,000, and enough to pay my mortgage -- $2,000 per month -- through December? I don't want to risk foreclosure on my home. I'm 55 years old. I know there's a stiff penalty, but I have no other option. Thank you for any advice you can offer.
-- Barbara

a_v2.gifDear Barbara,
I have been in your shoes and understand that three months without work can seem like an eternity. To keep yourself from going insane, you need a realistic plan. Without one, each day can become a descent into a black hole. I suggest a spending plan that will cover you for your anticipated unemployment period. An old rule of thumb is that if you are a professional or manager searching for work nationally, meaning you are willing to relocate, you should allow about one month for every $10,000 of income. Executives have other options, such as opening a business or consulting, and a trade person's timeline will vary widely by industry. Two other big factors are the unemployment rate and your age. You do not have an advantage in either of these categories.

Your age, in another regard, may be your friend. The rules for withdrawing from a 401(k) allow persons who are 55 years old and older and who leave their job to withdraw from the account without paying the 10 percent penalty. You will still have to pay income taxes on the amount you withdraw but will save the hefty early withdrawal penalty. With your diminished income from unemployment insurance, any taxes should be modest.

So, now that you know you can withdraw the amount you need without penalty, if need be, let's take a look at how you plan to manage your finances moving forward. Using the method above, make a ballpark estimate of how long you will unemployed. Next, look at a bare-bones budget and get a good estimate of what it will take to get you though the months ahead. Also, in your budget, figure in your unemployment compensation and any part-time job or temporary income you might be able to get.

This is an emergency, so any accumulated emergency funds can be used too. I would not pay your credit cards off using retirement money. If you are maxed out, then I would only pay the minimum. If you are not, I would judiciously use your remaining credit line(s) to fund essential expenses while you job hunt. You need to conserve your cash at this time. If you have no alternative, then using your 401(k) to cover your mortgage might be OK.

You may be a youthful 55-year-old, but it will still be hard for you to make up for any money that is withdrawn. So, if you begin taking money from your 401(k) starting now, you may have to defer retirement or take the chance you will outlive the amount you have saved. I know you said you have no job prospects on the horizon, so let me suggest that you expand your horizons.

When companies start to rehire, chances are they will use temp agencies first, keeping only the employees they like. This is more cost-effective than hiring full-time employees and safer legally if the employee doesn't work out. You may be able to increase your likelihood of some income by signing up with a number of temp agencies. They also may provide you with some interim work and with enough funds to leave your retirement account intact for a while longer.

Remember, you are not trying to replace your old income. You're just trying to fund a bare-bones budget so you can continue to look for the job you want and need.

Don't forget that networking takes time, but is an essential part of the job search. Be sure to get feedback on your networking and search so you can make positive changes. Finally, part of the reason for networking is to get support from others. Let your church, friends and relatives know you are looking. And be sure to not isolate yourself. Help will find you faster, if you keep yourself visible.

Good luck!

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