The latest piece from the New York Times in the growing genre of "Older workers finding it hard to get new jobs after a layoff" has triggered the predictable musings about whether we should raise the Social Security retirement age, and how to combat age discrimination. These are interesting debates, about which I hope to write more later. But the article is also a useful reminder about a more immediate issue: how people react when economic disaster hits.
The woman highlighted in the article, after all, is not going to be saved by Social Security; she's 57. Without massive changes in spending, she's headed for bankruptcy long before she's eligible to collect benefits. That's not to say that she's a profligate spendthrift who deserves the pain she's suffering; rather, the errors she's made are incredibly common. That's why it's worth running through some of the most common mistakes that land people in these kinds of messes:
A long excerpt from the article:
As an auditor, Ms. Reid loved figuring out the kinks in a manufacturing or parts delivery process. But after more than 20 years of commuting across Puget Sound to Boeing, Ms. Reid was exhausted when she was let go from her $80,000-a-year job.
Stunned and depressed, she sent out résumés, but figured she had a little time to recover. So she took vacations to Turkey and Thailand with her husband, who is a home repairman. She sought chiropractic treatments for a neck injury and helped nurse a priest dying of cancer.
. . .
In four years of job hunting, Ms. Reid has discovered that she is no longer technologically proficient. In one of a handful of interviews she has secured, for an auditing position at the Port of Seattle, she learned that the job required skills in PeopleSoft, financial software she had never used. She assumes that deficiency cost her the job.
Ms. Reid is still five years away from being eligible for Social Security. But even then, she would be drawing early, which reduces monthly payments. Taking Social Security at 62 means a retiree would receive a 25 percent lower monthly payout than if she worked until 66.
Ms. Reid is in some ways luckier than others. Boeing paid her a six-month severance, and she has health care benefits that cover her and her husband for $40 a month.
And she admits some regrets: she had a $180,000 balance in her 401(k) account, and paid $80,000 in penalties and taxes when she cashed it out early. She did not rein in her expenses right away. And now, her $500-a-week unemployment benefits have been exhausted.
She has since cut back, forgoing Nordstrom shopping sprees and theater subscriptions, but also cutting out red meat at home and putting off home repairs.
In order to qualify for accounting posts, she is taking an online training course in QuickBooks, a popular accounting software used by small businesses. She recently signed up for a tax course at an H&R Block tax preparation office in Seattle.
And she is plugging ahead with her current plan: to send out 600 applications to accounting firms in the area, offering her services for the next tax season. Eventually, she wants to open her own business.
So what could she have done differently to make this less devastating?
1) More retirement and emergency savings Too many people wait until their forties and fifties to start amassing retirement savings. Those are, it's true, the peak earnings years. But they're also years of risk. Older workers have more obligations--mortgages, college tuition, parents--and if they do lose their jobs, it takes longer to find work simply because they are not undifferentiated 25 year olds with low salary requirements, who can be slotted in practically anywhere.
It's all too easy to put off those retirement contributions. You're getting married. Then you want a house. You're having kids. You need a vacation, a new house, the car broke . . . suddenly you're 60, your peak earnings years are over, and you have to figure out how to survive a 20-year retirement on $100,000. Our parents got by on massive increases in the price of houses and stocks. You can't, so you have to pay yourself first, even when it's painful.
However, by the time a layoff happens, there's not much point in worrying about this one. Which brings us to point number two:
2) When a job loss happens, you need a crisis plan immediately Losing your job is an enormous psychological blow. This makes it tempting to baby yourself. Thinking about the bad things that could happen makes you anxious, so you don't do it. Worse, you're tempted to treat yourself to a few expensive luxuries you now have time to enjoy.
Now, if you've amassed the kind of savings that would allow you to live in relative comfort without ever working again, feel free. If you're more like the rest of us, this is absolutely the most destructive thing you can do. You are entitled to spend one evening consuming more scotch than you ought to, or scarfing down Ben and Jerrys, or indulging in your vice of choice. But the day after, you should be working out your IMF-imposed austerity plan. Cutbacks should begin immediately, and they should be deep: no restaurant meals, no trips, no expensive entertainments.
You also need a staged fallback plan: after how many months do you start selling stuff, or breaking leases, in order to lower your fixed expenses? The answer should not be "36". If you run through all your savings, bankruptcy will clear your debts, but it will not feed you. You need a plan that ensures you will always have enough cash flow to live no matter how bad things get.
Does this sound drastic? It is. But what's the worst that happens? You gave up restaurant meals for three months, and then found a new job. Well, promise yourself that if and when this occurs, you get to take all the money you saved and blow it on something really spectacular. Start pricing diamonds, or flat panel televisions, or whatever represents three months worth of cutbacks for you.
On the other hand, if you don't do this, and the job loss stretches into a couple of years--as can easily happen in a recession--the worst that can happen is that you end up out on the street, and have to start pricing refrigerator boxes and government-surplus cheese.
Nothing can be off limits: not schools, not the house, not the car. Just remember that all of these things will be even worse if you are thrown out on the street because you've run out of cash.
3) Don't take time off before you start looking for a job Another mistake that people make quite frequently is to go travel or do some volunteer work they've always dreamed of before they settle down to serious job hunting. This is a big mistake, especially in a recession. Ben Franklin famously said "Fish and houseguests begin to smell after three days", and if you change that to "three months", you've got a good description of what happens to job seekers in a tough market. Even though employers know, at some level, that you've had the deck stacked against you, they begin to wonder why no one else wanted you. And unfortunately, in a down market, there are always a lot of other, even newer job seekers coming close on your heels. It's tempting to "wait until the market gets a little better", but unemployment is a lagging indicator; by the time it gets better, your skills and contacts may well be stale.
4) Don't touch your retirement savings before the age of sixty The penalties and tax you will pay are devastating. Moreover, 401(k)s and similar vehicles are protected in bankruptcy, which means that if the worst happens, you will still have something to ensure that you don't starve in retirement. Whereas if you pull the money out to cover your mortgage or car payments, you may well lose all those assets anyway--and your retirement as well.
5) Don't refinance the house, either At least, not to get cash (it's fine if all you're looking for is a lower interest rate) Home equity is also (usually) shielded in bankruptcy. You should never, ever put your food or shelter at risk in order to pay other bills.
6) Get a job doing something--heck, anything I know, I know: job seeking is a full time job. Well, you wouldn't be the first person to have two jobs. Even a part-time job does two things: it gives you a little bit of cash for current expenses, and it gives you something to focus on besides your unemployment. Depression is an extraordinarily common side effect of unemployment, and it worsens when you sit home and dwell on it all day.
If you're married, getting a part time job will also help ease the stress on your spouse, who will be considerably less anxious if they see that you are active. A job search can't be observed; a shift at Starbucks can be.
These rules won't make a layoff painless. But in a lot of cases, they could keep it from turning into a catastrophe.
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is a columnist at Bloomberg View
and a former senior editor at The Atlantic.
Her new book is The Up Side of Down