In 2008, there were a stunning number of downsizings, buyouts, and layoffs. In November alone 533,000 workers lost their jobs, bringing the year's total to 1.9 million and driving the unemployment rate up to 6.7 percent, a 15-year high. And it looks like things might get worse before they get better. Some economic forecasts say that unemployment may reach 9 percent this year.
If you've joined the ranks of the unemployed or you're afraid you might soon, it's a good time to take some precautionary steps. We've got advice on how to keep your finances on track if you lose your job, along with job-hunting tips to help you get back to work sooner.
In November 2008, International Paper announced that it would offer voluntary severance packages to its 1,050 hourly employees at a Virginia mill. While International Paper and other companies aren't required to offer severance packages, many employers do it so that they can maintain at least some employee morale while paring the workforce.
Your total severance might be anywhere from the equivalent of two weeks' to six months' pay or possibly more. Generally you can expect one week of salary for every year of service, says Jay Meschke, president of EFL Associates, an executive search firm. Unless you are a top-level executive, you might not be able to negotiate a better severance deal, although there's no harm in asking.
Companies typically let you choose to receive your severance in either a lump sum or a series of payments. If you think your company is still financially sound, consider taking the payments, which will allow you to keep getting a paycheck for as long as the severance lasts. Your employer might also allow you to keep contributing to your 401(k) plan. And you might be eligible for employer health insurance, life insurance, and other retirement benefits for as long as the payments last.
If your employer is on shaky ground, a lump sum is a safer bet. But be prepared for a significant a tax hit. The Internal Revenue Service classifies lump-sum severance pay as supplemental wages, and your company will withhold taxes accordingly from your payout. A one-time lump sum could also push you into a higher marginal tax bracket for the year.
If you go the lump-sum route, consider stashing your earnings in an online savings or money market account. They're liquid, meaning you can easily access that cash if you need it. Go to www.bankrate.com to find the best rates.
If you've lost your job, the first item on your to-do list should be to call your state's unemployment office to apply for benefits, says Alison Doyle, author of "Internet Your Way to a New Job: How to Really Find a Job Online" (Happy About, 2008). Most states begin the benefit period from the day you file your claim, not the day you were let go. It generally takes two to three weeks after you file to receive your first check. If you received a severance package, ask the unemployment office if you are still eligible for immediate unemployment benefits. New Jersey, for instance, allows some people to collect unemployment compensation alongside their severance pay.
Unemployment benefits used to be available for a maximum of 26 weeks, but since the Unemployment Compensation Act of 2008 was signed into law last November, laid-off workers can collect benefits for an additional 20 weeks. People who live in states with high unemployment rates—such as California, Rhode Island, and Michigan—can get another 13 weeks of benefits.
Benefit amounts are based on a percentage of what you made during your last year of employment, up to the maximum in your state. Remember that unemployment benefits, like regular income, are taxable.
Once you've got a source of income lined up, turn to health insurance. "It's very important to continue your health coverage and prevent an exclusion period," says Melissa Hammel, a fee-only financial planner in Brentwood, Tenn.
If you're married and your spouse's employer offers health insurance, you might be eligible to join his or her plan. Losing your coverage because of a job loss is often considered a qualifying event, which means you can be added to your spouse's health plan even if the open enrollment period has passed.
If that isn't an option, you may be eligible for coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act), which allows terminated employees to temporarily continue insurance under their former employer's health plan. To qualify, your former company must have employed at least 20 workers for more than half the prior calendar year. COBRA benefits generally last for 18 months. After you lose your job, you usually have 60 days to decide whether or not you want to sign up for the program and 45 days to pay the first premium.
As you might expect, COBRA coverage isn't cheap. The program requires you to pay the premiums as well as an additional administrative fee of up to 2 percent of your yearly premium. In 2008, the average annual premium for an employer health plan covering a family of four was $12,680, according to a survey by the Kaiser Family Foundation and the Health Research & Educational Trust. Factor in the maximum COBRA fee, and you may be looking at an insurance bill of nearly $13,000.
If you're approaching 65, plan to apply for Medicare coverage about three months before your birthday. If you're too young for Medicare and you're healthy, you might be able to secure personal coverage at a better rate than COBRA's. But Hammel suggests enrolling in COBRA as soon as possible anyway. "By keeping COBRA benefits in place, you have coverage without a gap until you find a new job or secure personal coverage," she says.
For more information on COBRA, contact your employer health-plan administrator or check the frequently asked questions on the Web site of the Employee Benefits Security Administration. If you're looking into getting coverage on your own, start at ConsumerReportsHealth.org and click on the insurance tab at the top of the page.
Your employer might allow you to continue the company's group life insurance if you pay your own premiums, says Matt Tassey, past chairman of the LIFE Foundation, a nonprofit group dedicated to helping consumers sort through insurance decisions. But life insurance might not be worth the expense if you have no dependents or your children are grown up and self-sufficient.
You may want to keep your coverage, however, especially if you have dependents to support. If that's the case, you may be able to find less-expensive term plans on your own. According to the Insurance Information Institute, premiums on standard-risk term life insurance have dropped 50 percent since 1994. Go to www.findmyinsurance.com and www.lifeinsure.com for quotes. Remember to check insurance company financial ratings with A.M. Best, Fitch Ratings, and Standard & Poor's before you sign up for a plan.
Some employers will allow former employees to leave their 401(k) funds in the plan as long as they have more than $5,000 invested. Check with your human resources department first to see if you'll be charged additional fees for the privilege.
If you have to (or want to) move your money, you can roll it into an individual retirement account or, if you've been lucky enough to land a new job, transfer the assets directly to your new employer's 401(k) plan. If you decide to roll it into an IRA, you'll usually have 60 days to do so.
If your employer cuts a check instead of moving the money electronically, make sure it's made out to the new account's trustee. A check made out to you will be treated as a withdrawal by the IRS and you'll owe taxes on the total plus a 10 percent early-withdrawal penalty if you're under age 59½. Contact your plan administrators to initiate a transfer to your new employer's 401(k).
Nearly 45 percent of workers cash out their 401(k)s when they change jobs, according to the human resources consulting firm Hewitt Associates. Unless you absolutely need the money, don't cash out of your plan. If you do, you'll have to pay income taxes on the money you take, and the IRS might also impose a 10 percent early-withdrawal penalty. You'd also be draining your retirement savings.
This article was also published in Consumer Reports Money Adviser. Subscribe now to get more expert financial advice you can trust.