Don't Let the "Pink Slip" Ruin Your Financial Plans

You may enjoy job security for the rest of your career. Still, you never can tell. Your company may be doing well today, but things can change. And, unfortunately, large-scale layoffs are not a thing of the past. That's why you need to take some measures to protect your financial plans against threats to your employment stability.

Here are a few "pink-slip protection" ideas to consider:

• Build a "cushion." Ideally, you'll want to prepare for a layoff well before it ever happens - or even if it doesn't happen. And that's why you should maintain an emergency fund to cover at least six months' to a year's worth of living expenses. You may want to put your fund in a money market account, which offers the liquidity you'll need. Apart from increasing your cash flow in case of a layoff, your emergency fund will help you avoid tapping those investments earmarked for long-term goals, such as retirement.
• Don't raid your retirement plans. If you're laid off, you may be tempted to cash out your 401(k) or other employer-sponsored retirement plan. However, liquidating your 401(k) could be a big mistake. You'll have to pay income taxes on the proceeds, and if you're under 59-1/2, you also may have to pay a 10 percent premature distribution penalty. Even more importantly, you'll be robbing yourself of a major source of retirement income. You'll have the same tax problems if you cash out your traditional IRA. However, if you have a Roth IRA, you can make tax-free withdrawals, provided you've had your account for at least five years and you're at least 59 1/2.
• Consider adjusting your portfolio. If you get laid off, you may need to adjust your investment portfolio to provide more income. For example, you may want to think about moving some of your assets into income-producing vehicles, such as bonds or dividend-paying stocks. There's a big difference between the two, though, so you'll want to do your homework before taking action. For one thing, investment-grade bonds will probably offer greater protection of principal than stocks that pay dividends. On the other hand, the interest from bonds is taxable at your current income tax rate, which is likely to be higher than the 15 percent tax rate assessed on most stock dividends.

A financial professional can help you select the right income-oriented investments. But, with any luck, you'll only need to draw on your investments to boost your income temporarily. Once you're employed again, you can readjust your portfolio to accommodate your need for both growth and income.

• Be a smart borrower. If you have to borrow, be smart about it. Instead of running up debts on a high-rate credit card, consider alternatives. If you have a permanent life insurance policy, you may be able to take cash from it. Or, you may be able to take out a home-equity loan; your payments could be tax-deductible, and your interest rate will likely be reasonable. (Keep in mind, however, that you're using your home as collateral; if you think your layoff is likely to last an extended time, this type of loan may not be appropriate.)
• Take full advantage of work-related benefits. If you are laid off, you may be eligible for unemployment insurance; if so, follow through on the necessary paperwork. You might also be offered a severance package; try to negotiate the most favorable one possible.

Look at all your options...

While it's unpleasant and inconvenient, a layoff doesn't have to jeopardize your financial future. So, if you've just been laid off, step back for a while and carefully plan your next moves. If you haven't been laid off, but you think the possibility is there, prepare yourself as best you can.

Ultimately, if you're facing a layoff, you may need to draw on all your options. And you might be surprised by how many you have. By making the right choices, you can survive the layoff - and stay on track toward your long-term objectives.



Piper Jaffray & Co., Member SIPC and NYSE.