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Job Loss

What to Do If You Receive a Severance Package

So you lost your job and you didn’t get the $434,668 severance package that U.S. Treasury Secretary Timothy Geithner nabbed from his former employer, the New York Federal Reserve Bank. But you probably still walked away with a chunk of money (maybe it was closer to a nugget) that you didn’t have before you were let go.

Assuming your income was a tad less than Geithner’s, who earned $411,200 last year as president of the bank, according to a financial disclosure filing in late January, you may be wondering how to make that severance package last.

First, severance packages are considered taxable income, so be prepared in the event you wind up with a tax bill next year. Also, understand that you’re relatively fortunate if you do get a severance deal. Companies are not required to offer them, though many do provide some kind of compensation.

Marcia Rhodes, a spokeswoman for WorldatWork, an association of human resources professionals, says that 31 percent of employers gave one week of pay for every year of service in their severance package in 2007, the latest year available; 20 percent offered two weeks of pay for every year worked; and 40 percent used some other formula.

With companies expected to continue shedding jobs in 2009—an estimated 2.6 million jobs were lost last year—preserving your pool (or puddle as it may be) is the name of the game.

Curb Spending

To stretch those funds, consider cutting your daily living expenses. Reduce or eliminate pay TV programming, suspend your gym membership, ask credit card providers to lower your interest rate, and stop dining out. Suspend contributions to your IRA and to your children’s college savings fund. Forgo the lawn and cleaning service. Cut coupons, shop around for better rates for auto and homeowner insurance, and lower the thermostat to reduce utility bills.

Financial experts tell AARP Bulletin Today that it may take you longer to find another job—on average 3.7 months for workers age 50 and older compared with 3.3 months for younger workers. When you do find work, the salary may be less than what you had been earning.

“These are drastic times, and drastic times call for drastic changes,” says Kelly Campbell, a certified financial planner and founder of Campbell Wealth Management in Fairfax, Va., a suburb of Washington, D.C. “Look at how you can change your lifestyle and tighten your belt. Fixed expenses can be lowered and discretionary expenses can be cut out. Businesses find ways to save money, so you have to think of your family’s economic situation like you’re running a business.”

Boost Coffers

Greg Merlino, a certified financial planner and founder of Ameriway Financial Services in Voorhees, N.J., recommends socking away a large part of your severance funds in a bank account so that it can be easily tapped if the job search lasts longer than expected and cash runs thin. He would put the rest of the money into what he called less risky, high-grade corporate bonds, bond mutual funds or exchange-traded funds because their returns are typically higher than money market accounts or most certificates of deposit.

To those who may be tempted to use their severance funds to invest in equities when prices are down, Merlino says, “Don’t.” Your goal should be to beef up your cash reserves, not invest in the stock market or other risky ventures.

Of course, if you have ample savings and snagged a generous severance package, you might want to be slightly opportunistic with those funds, says Tim Courtney, chief investment officer at Burns Advisory Group, Oklahoma City. Buying up shares in today’s bear market, when your money goes farther, could leave you sitting pretty years from now when the market recovers and turns bullish.

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