Job loss

10 steps to help you prepare and cope

The potential for a job loss in today's economy is very real. That's why it's critical to be prepared — whether for a job loss or other potential crisis.

Here are 3 actions you should take now to prepare:

1. Build your emergency fund cash reserve.

An adequate cash reserve enables you to handle the unexpected, so you don't have to dip into your long-term investments. The rule of thumb: Set aside enough money in an emergency fund to pay for three to six months of living expenses in case you lose a job or go through any other financial crisis. If you are self-employed or face poor job prospects in case of a layoff, it would be better for that cash cushion to cover six to 12 months. But no matter what you have set aside, add to it regularly. Every bit helps.

2. Take out a home equity line of credit (HELOC).

A home equity line of credit allows you to take the equity in your house and use it for other purposes, including to establish an emergency cash reserve or to finance major expenses. Having this type of credit available can help you make ends meet if you lose your job. Plus, a HELOC offers these advantages:

• You only pay on the funds you use. For example, if you have a $50,000 HELOC and use $10,000, you only pay interest on the $10,000 balance, not the full line amount.
• You have immediate access to cash. Most HELOCs offer personal checks so you can access your funds at any time.
• You can hold off on using long-term investments for your short-term needs, which can help you avoid potential tax penalties in certain situations (for example, taking money out of an IRA or retirement plan before age 59 ½).
• You can lower your cost of credit. Interest rates can be much lower through a HELOC than a credit card or personal loan.
• In some situations, you may be able to deduct the loan interest (check with your tax advisor).

3. Look for riders on insurance policies.

Some life and disability insurance policies have riders that waive premiums if you are unemployed. A waiver enables you to keep your important insurance protection in force, even when you may be unable to make premium payments. Check your policies to find out if a rider is already included. If not, discuss your options with your insurance professional.

What if you lose your job?

There are a number of important decisions to make and steps to take right away. Start with these:

4. Scrutinize your monthly expenses and overall budget.

Look at everything with a critical eye. Decide what's really necessary and what's discretionary. You may naturally spend less by not commuting (no cost for parking and gas) and eating fewer lunches out, but these budget cuts won't make up the income gap. Look for ways — large and small — to trim back expenses. For example, you may be able to reduce cable TV and internet services, switch to a less expensive grocery store and obtain better rates on your auto and homeowner's insurance coverage.

5. Apply for unemployment benefits.

Unemployment benefits (also known as unemployment insurance) can help stretch out the time that your dollars will last, so apply right away. Benefits won't be paid until you start the ball rolling. In most states, you can apply at the local unemployment office or online, making it convenient and fast. Just make sure you're ready with your:

• Mailing address and telephone number
• Social Security number
• Driver's license number
• Separation date if you served in the military

Unemployment benefits are generally available for up to 26 weeks, but recent changes resulting from the American Recovery and Reinvestment Act of 2009 (ARRA) — or the economic stimulus package — and the Worker, Homeownership and Business Assistance Act of 2009 have extended benefits by as many as 53 additional weeks, depending on the state in which you live.

Additionally, a few new benefits apply during 2009:

• A $25 increase in weekly unemployment compensation payments.
• A tax break — the first $2,400 of unemployment benefits collected this year will not be subject to federal income tax.

Remember that taking severance pay, temporary work or retirement payouts may disqualify you from receiving benefits, so make sure you carefully consider your options.

6. Prepare to pay taxes.

Because taxes generally need to be paid on unemployment benefits (some get a tax break, see above), but money is not automatically withheld to cover them, you'll need to set aside an appropriate amount to pay your taxes later. Depending on your circumstances you may need to make estimated tax payments.

7. Secure health insurance.

If you currently have health insurance through your employer, a federal law known as "COBRA" entitles you to continue receiving that coverage at your own expense for up to 18 months at group rates upon termination of employment. Plus, as a result of ARRA, individuals involuntarily terminated from their jobs between Sept. 1, 2008 and Feb. 28, 2010, and who elect COBRA, can benefit from an employer subsidy equal to 65% of the premium for up to 15 months.

Action: Your employer or plan administrator is obligated to provide you with an election notice to enroll in COBRA coverage.  This notice will inform you of the date your COBRA coverage is effective, when it ends and the cost.

COBRA has some pros and cons

Pros:

• COBRA provides much-needed insurance coverage while you are between jobs.
• Coverage from COBRA can last up to 18 months, or even longer in some circumstances.
• COBRA helps if you have pre-existing conditions because it allows you to retain the health insurance plan from your old job, regardless of your health condition.

Con:

• Although the group rates available to COBRA participants are generally less expensive than rates for individual health coverage, they are more expensive than rates for active employees.

If your spouse has a health plan, evaluate how it compares to continuing your health insurance under COBRA. In some cases, it can be less expensive with equivalent or better benefits. If so, try to enroll. A job loss is typically a qualifying event for making benefit changes.

You may also want to consider these options:

• Buying insurance through a private health insurance company (keep in mind that this can be expensive and you may have pre-existing conditions that would disqualify you from coverage).
• Using a Health Savings Account (HSA) to pay for current or future health care expenses.

8. Search for creative cash-flow solutions.

When you're not searching for jobs, writing cover letters and interviewing, take advantage of your downtime. Clean out your closets, attic and garage to find old clothes, furniture and other personal items you no longer want or need. Hold a garage sale or take the items to a local consignment shop, or try marketing them online through sites like Ebay. If you have items you're unable to sell, donate them to charity — and potentially enjoy a tax break.

Certain job search expenses may be deductible. For example, you may be able to deduct travel expenses for your job search and interviews. Be sure to keep receipts and discuss with your tax advisor.

Try to avoid taking on more debt if at all possible, but if you do, consider leveraging a home equity line of credit (see #2 above) or low-interest credit card — ideally, with a fixed-rate option. And make sure you keep making timely payments on existing loans — especially your mortgage.

9. Leave your retirement account alone if you can.

If you can avoid cashing in your 401(k) or retirement plan balance, you'll be better off. The many drawbacks to taking a retirement plan distribution include:

• 20% mandatory federal income tax withholding for eligible rollover distributions, which may be more or less than the amount withheld depending on your tax bracket. State taxes and withholding may also apply.
• 10% IRS early distribution penalty if you are younger than 59½.
• The potentially large hidden cost of losing ongoing tax-deferred growth.

10. Talk with your advisor.

At a time like this, meeting with an experienced financial professional can be especially helpful. Talk with your Ameriprise financial advisor to make sure you're making the best decisions to help you get through this difficult time.