Good Habits Soften Unemployment’s Blows

worker During his 25 years as a boat builder, Tim Parker had done everything right financially: contributing to his 401(k) retirement plan, paying off his mortgage and credit-card debt, living on a tight budget and saving money for a rainy day.

Then, unexpectedly, he was unemployed, working part-time jobs to make ends meet, and finally going back to school to prepare for a new career.

“I was just devastated. I really felt the rug had been pulled out from under me,” said Parker, 50, who lives in Altamonte Springs, Fla., and was laid off nearly two years ago. “I was expecting to stay with that company another 15 years, until my retirement. But that was not in the cards, I guess.”

Parker is like millions nationwide still unemployed as a result of the Great Recession and trying to keep their finances on track amid another “jobless recovery.” Many have lost their homes and savings in the economic turmoil, but others have navigated it pretty well so far.

It helps, experts say, if your financial house was in order before landing in the unemployment line. Parker, for example, was well-positioned for handling adversity, according to Charlie Fitzgerald, an Orlando financial planner who advised Parker after he was laid off.

“Tim was way ahead of the curve,” Fitzgerald said. “He had cut his budget in about every way possible. He was not in debt. The mortgage was paid off. His credit was good. So when things came crashing down, he was ready.”

As unemployed workers review their finances, the biggest asset on this list ? even for homeowners, if the housing slump has left them underwater with their mortgage ? is often a 401(k) retirement account.

The cardinal rule, financial advisers say, is to keep that money intact, no matter how tempting it may be to tap it after you’ve lost your job. Any money you take out of a 401(k) before age 59 1/2 is subject to a 10 percent federal penalty ? as well as federal income tax. (The exception to this rule: If you were 55 or older in the year you were laid off, you’re exempt from the 10 percent penalty.)

Experts also point out that 401(k) funds are protected from creditors in a personal-bankruptcy filing, so tapping them as a “last resort” before declaring bankruptcy is not a good idea. But don’t count on taking out a loan from your 401(k) plan if you are laid off, either: The program’s loan provisions apply only to account holders who are still working.

Laid-off workers may keep their money in their ex-employer’s 401(k) plan or roll it over into an individual retirement account, or IRA, under government rules. Advisers say that, if the 401(k) is a good plan, with low expenses and solidly performing funds, you should consider standing pat to take advantage of the resources such plans offer, such as investment-ratings data and other information, said Jason Chepenik, managing partner of Chepenik Financial, an Orlando financial-planning firm. Older workers should definitely avoid rolling over 401(k) funds into an IRA, he said, because early withdrawals from an IRA are always subject to the 10 percent government penalty, even if the laid-off employee is age 55 to 59 1/2.

Workers who lose their jobs should adjust the asset allocation of their retirement plans and investment accounts ? that is, the mix of fund types they have chosen for their money ? to reduce the overall riskiness of their holdings while they are unemployed, Chepenik said.

He cited the recent case of one client, a 53-year-old unemployed defense-technology engineer, who had already cut his stock-market exposure to 70 percent equities versus 30 percent cash and bonds. Chepenik reduced it further, to a 50-50 split between stocks and more conservative investments.

“Basically, I believe in the (calm-)stomach factor and enabling the client to sleep better at night,” Chepenik said. By comparison, a young worker with a higher tolerance for investment risk might have 90 percent of the money in stocks.

“He (the engineer) can no longer afford to have such exposure to the equities market and see his portfolio bouncing around like that,” Chepenik said. “So you have to limit the volatility of the portfolio and its impact on his ability to eventually use that money for income.”

Tim Parker, the former boat-factory worker, said he and his wife, who have three children, have slept better since getting help with their finances during his unemployment. Meanwhile, he’s taking classes to become a certified air-conditioning technician.

“I’ve gotten such great support from my church, my family and friends during these tough times,” Parker said. “I know there are a lot of people really hurting out there because of the loss of their jobs or homes in this economy. But I have not given up. I’m still looking. I still believe things will get better.”

Source: McClatchy-Tribune Information Services.