Tips on How to Survive a Layoff

Aug. 7, 2001 -- If you have been laid off this year, you're in good company.

More than 650,000 Americans were laid off between January and May of this year. That's 40,000 more than were laid off in all of 2000.

July Job Cuts

Good Morning America's frequent contributor Mellody Hobson, President of Ariel Capital Management in Chicago, provided advice for what to do following a layoff.

Protect Your Retirement

First, scrutinize your severance package to see where you stand on important issues such as health insurance coverage, Hobson said. And be sure to request a recent statement for your 401(k) plan.

"Know who you need to call to make any changes in the future, such as a rollover into a new company plan or a personal IRA," Hobson said. "Find out if there will be an exit fee. At all costs, do not touch the money!"

Retirement Planning Calculators

The tax penalties for withdrawing the money you have saved for retirement are huge, so resist the urge, Hobson said. The average 401(k) is worth about $55,000.

If you withdrew $20,000 from that average 401(k) over several months, you'd have to pay a 10 percent penalty, plus taxes. Assuming you are in a 28 percent tax bracket, the $20,000 would end up only being worth $12,400. If you had not touched the money, it would have grown at 10 percent for 25 years, yielding $595,909. With the $20,000 subtracted, the 401(k) would be worth $379,215 — a difference of nearly $220,000 in long-term growth.

In the 1980s, many workers had their personal worth tied up with their workplace.

Of course, if you are being laid off, your company's financial state is at issue.

"You really want to think through if the company's financial problems are temporary or more terminal," Hobson said. "You might want to cut your losses and take your lumps: take the stock money out and invest it in a Roth IRA or a mutual fund account."

Be Sneaky About Health Insurance

COBRA (which stands for Consolidated Omnibus Budget Reconciliation Act) is a federal law that allows the unemployed to continue their health care coverage after leaving their job.

But you must pay for COBRA coverage, which is available up to 18 months. You have 60 days to decide if you want to elect COBRA, and within those 60 days, you can elect retroactively.

"This means that if you break your leg in the 59th day, you can elect COBRA and you'll be covered," Hobson said. "Break your leg on the 61st day, and you'll pay for that cast yourself."

The financially savvy person doesn't elect COBRA unless they need it within those 60 days, because they will presumably find a new job with health insurance.

If you can afford to pay the money to avoid a potential bureaucratic nightmare, if you have a pre-existing condition or if you are traveling overseas, get COBRA, Hobson suggests. But you should also check to see if your state has provisions that are more generous than COBRA.

Avoid Using Credit Cards

Ideally, every person has three months of living expenses laid aside for emergencies, but if you do not, using a credit card can mean paying up to 18 percent in interest charges later, Hobson said.

Instead, consider getting cash with these options:

Open a home equity line. If you own a house or condo, you can borrow against the money you've put in, and the interest you pay (about a point over prime rate, 6.5 percent now) is tax deductible.

For example, if you take a $2,500 equity loan at an interest rate of 7.75 percent, and it took 10 years to pay it off, you'll end up paying $1,100.32 in interest, meaning you will pay $3,600.32 all told.

But if you borrowed $2,500 from your credit card and paid 18 percent interest for 10 years to pay it back, you will end up paying $2,825.67 in interest, for a total payback of $5,325.67. The difference is $1,725.35, more than half the loan.

Another strategy is to borrow against your whole life insurance. If it's a policy that has a cash value you can borrow against it while you're alive. If there's cash value buildup, you might want to use this money in an emergency — such as getting laid off — because the interest rate (which varies, depending on policy) is nearly always lower than credit card debt.

Get in Line

Apply for unemployment right away, as benefits take a couple of weeks to start up, Hobson said.

"Now is not the time to be proud — this is not welfare! This is your right as a taxpayer," she said.

To collect, you have to have become unemployed through no fault of your own (such as being laid off) and meet certain state requirements for wages earned or time worked during a certain period. Make sure that you have federal taxes withheld or you will have to pay them come tax time.

Be Time Rich and Money Poor

After the layoff, you should slash your budget, eliminating luxuries and focusing on necessities.

Budgeting Calculators

"You don't know how long you'll be out of work," Hobson said. "The more money you save, the more you'll have."

Pare back on big purchases and rethink your vacation plans. You should cancel magazine subscriptions, bring a list to the grocery store, and check your bank fees and credit card interest rates. Recognize that you are time-rich and money-poor. Take public transportation instead of a cab.

Become Your Own Boss

Consider consulting or doing free-lance work to tide you over. When companies go through extreme layoffs, eliminating say 50 percent of their workforce, they may hire a lot of consultants back on.

Even after you've been laid off, you can go back to your boss and ask if there are opportunities to consult, especially after the dust settles, and if you have a skill they recognize the value of in hindsight.

"But be sure to do your homework in advance, so you can request realistic hourly rates, which can range from $50 to $500 depending on the job and the industry," Hobson said. Negotiate hard, and do not sell yourself short.

Get your own business cards and set up a Web site for your business.

Take Credit Where Credit Is Due

If you don't have emergency money or severance, alert your credit card companies and set up a payment plan in advance telling them you'll be late. Keep in touch with your creditors. Talk to your landlord about paying rent late.

You may want to switch to a credit card with a lower introductory interest rates. And remember to save your receipts. Everything you pay for on your job search is tax-deductible, to the extent that it exceeds 2 percent of gross income.