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With the more accurate gauge of unemployment hovering at about 17% and with some estimates indicating that 30% of households have experienced some form of job loss, there are more reasons now to be cautious with your financial planning. While the majority of Americans have managed to endure the Great Recession and emerge financially intact, millions of families have been less fortunate. For whatever reason, many people didn’t plan for the worst case scenario. It’s all water under the bridge now, but there are things people can do to mitigate the unbearable burden of prolonged unemployment. For one thing - we should plan for it. It might never happen but if it does, make sure you retain the ability to hunker down, weather the storm and take care of your family. Here are 15 key points in 3 areas to help you plan for the worst.
Utilize Retirement Accounts:
Retirement accounts are meant for your golden years, but they can, and should be tapped in a crisis. While some experts disagree, I would ask them what's the point of saving your money for retirement if a prolonged period of unemployment wrecks everything so badly that your life goes into a tailspin? Retirement plans should have a dual purpose - to make sure we are comfortable in our old age and to create a buffer for prolonged involuntary retirement during our peak earning years. The dual purpose of retirement accounts is all the more incentive to save while you have gainful employment.
No matter what your age is, there are many reasons why IRA and 401K plans are great for emergencies.
1. If you are married and one spouse loses his or her job, the other one can tap a 401(k) plan by taking out a loan. Loans are to yourself, so the interest you pay is paid back into the account. Loans are limited to 50% of the account value up to $50,000.
2. If you’re under 59 1/2, you might have to pay a 10% early withdrawal penalty. But the penalty can be waived for a variety of reasons including if you have medical expenses above 7.5% of AGI or if the distributions are not more that the cost of your medical insurance. You will have to still pay taxes but if your income is low, you won't pay much.
3. If you use the money to go back to school, the penalty can also be waived. There is also a way to prematurely take the money out in equal installments over a number of years without paying the penalty. To make sure you know what you’re doing, consult with your financial advisor or an accountant before taking advantage of this option.
4. If worse comes to worse and you have to file for bankruptcy, your IRA and other retirement accounts cannot be touched by creditors. Bankruptcy is not something most of us contemplate but you never know where life takes you and retirement accounts are one way to emerge from bankruptcy with some of your assets intact. Even if you only have ten or twenty thousand in an IRA, it will help you deal with loss of credit and give you a better opportunity for a fresh start.
5. Withdrawals from your IRA will help augment your meager unemployment checks. If you’ve also taken the standard advice to save up six months worth of expenses in an emergency saving account, you can probably survive two years without a job. Hopefully, that is long enough to get hired.