How to prepare financially for a layoff

Workers are seeing headlines they haven't seen much in recent years: layoffs, tens of thousands of them in some cases. Unemployment is at a 16-month high, and although overall employment is still strong, the economy is slowing and workers in many sectors are bracing themselves for pink slips.

Federal employees are as vulnerable as any other. President Bush wants to slow down the growth of government programs and contract out more work.

What can you do to prepare for a possible layoff? And what should you do if it arrives? With sound financial preparation, you increase your odds of weathering a layoff and even put yourself in a position where you won't feel pressured to grab an undesirable job.

• Prepare a written budget. This clarifies your cash-flow situation and helps you with the other strategies spelled out here.
• Dump debt. Extra debt beyond your home mortgage and perhaps your car loan can weigh heavy if you are laid off, especially high-interest credit card debt. Pay off as much debt as you can while you still have a job.
• Build a cash reserve. Ideally, you already have an emergency fund in place for just this sort of possibility, preferably with at least three to six months of cash to cover bare-bones expenses. If you don't have such a fund, or it's not well-funded, put cash in it now while you can afford to.
• Cut expenses. Feed your emergency fund and perhaps even test run a bare-bones budget in the event you are laid off. Tighten your financial hatches as much as possible and look at what expenses you could do without or reduce if you were to become unemployed. Evaluate things such as entertainment (do you really need the premium channel cable service?), clothing and meals out. Surprisingly, many unemployed workers try to maintain their employment lifestyle, often by piling up credit card debt, dipping into retirement savings or running through their severance packages.
• Get a line of credit. Dennis Filangeri, a certified financial planner based in San Diego, advocates getting a line of credit while you still have a job. You won't be able to get it once you're laid off. Don't touch the credit unless you absolutely need to, but it may come in handy while you're looking for work. A home equity line of credit likely would be less expensive than a bank line of credit, and you'll get tax deductions for the interest. Just be sure you can keep up with the monthly payments, because you do put your home at risk.
• Start scouting for jobs. This includes not only outside firms, but positions that may be available inside your agency. As odd as it may seem, even though your agency may be laying off workers in some departments, it may be hiring in others — often from the inside first. Keep looking for work once you are laid off. Amazingly, it's common for unemployed workers sitting on top of generous severance packages or lump-sum retirement payouts to postpone looking for work for months. Take your layoff as a good opportunity to upgrade your marketable skills.
• Negotiate an exit package. If the pink slip does arrive, you may be eligible for a substantial severance package. You may have options, such as taking early retirement, taking a lump-sum payment, etc. Review exit package options with your certified financial planner.
• Continue health insurance. Don't go without it! Continue your Federal Employees Health Benefits Program group health insurance.
• Don't count on unemployment insurance. It won't begin to make up for your lost wages, though every little bit helps. Also keep in mind that unemployment insurance income is taxable, and it's short term.
• Don't touch your retirement funds. Try to avoid borrowing or withdrawing funds from your retirement accounts or spending lump-sum retirement payouts from a former employer. The layoff probably will be temporary, but retirement isn't. Pulling funds out early could cost a lot in taxes, penalties and lost growth opportunities.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at miltzall@starpower.net.