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Don’t Scramble Your Nest Egg: Resist the Urge to Access Retirement Funds While Unemployed

The recession and its aftermath have led to periods of unemployment for many workers, in some cases for the first time in their careers. During these times, it is important to resist the temptation to withdraw money from any of your retirement plans to cover living expenses. Two things make this a bad idea. First, you have to pay taxes on money taken out, so it becomes a very expensive source of funds. Second, the power of tax-free compounding on that money is gone. If you need funds over and above unemployment benefits and severance pay, use after-tax savings to make up the difference.

Before spending any savings, take a hard look at your expenses and do a budget based on only necessities. Then discipline yourself to live on that budget. If your have credit card debt, clear it with some of your severance pay. Carrying a balance that is subject to monthly fees is not an acceptable expense at any time, but particularly when you are not employed.

Assuming that you will not touch your retirement plans while you are out of work, there is no need to change your approach to investing while unemployed. That further assumes that you have a plan that provides proper diversification and reflects an appropriate level of risk in these uncertain economic times. Equity holdings should be in corporations that over time have increased their dividends, have clean balance sheets, international diversification and stable earnings predictability. They are more likely to be able to weather the storm during a faltering economic recovery.

Bonds should be Treasuries or high quality Corporates of short to neutral duration.  Cash, though earning very little, should be part of the mix. It does not go down and will provide funds for increasing your equity exposure when the market presents a more favorable risk/reward scenario. If you have no plan and are not working with an advisor, this would be a good time to start. Let a professional advisor determine what to do with your investments, so you can focus on finding a new job opportunity.

If possible, contribute to a Traditional IRA or Roth IRA for both you and your spouse. W-2 earnings are required to do this. Your tax and earnings situation will dictate whether it is better to contribute to a Traditional IRA or Roth IRA. Another area to explore is the possibility of this being an advantageous time to convert some of your Traditional IRA to a Roth IRA. My previous blog post discusses the subject.

It takes discipline to safeguard retirement savings during unemployment, but if you succeed, it will keep your nest egg intact and ready to grow when your career resumes.

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Posted in Reaching Retirement.

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