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Laid-off workers struggle to survive on severance pay

If you are laid off, first address financial needs. If you are married or in a relationship, discuss budgeting, expenses and time management.

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If you are laid off, first address financial needs. If you are married or in a relationship, discuss budgeting, expenses and time management.

When Carlos Pero learned his job would be eliminated, he took some comfort in learning he would receive three months' severance. But making that sum last has been more challenging than expected. Even with his wife working, the bills are coming faster than the job interviews.

"Now, it's all about trying to make and save money wherever we can," said Pero, a Web developer.

As companies cut employees, many like Pero find surviving on severance requires a take-charge attitude, time management, communication with your spouse and some heavy-duty budgeting. It also takes immediate action.

Shocked and numb? Don't even consider chilling for a while. Thinking about investing to stretch your severance? Probably not a good route, either.

The average severance ranges from 12 to 14 weeks, outplacement firm Challenger Gray & Christmas reports. But competition for jobs is fierce: A staggering 4.4 million workers have lost jobs since the recession began 15 months ago, with 651,000 jobs lost in February alone.

Clearly, focusing on the job search is hard when you're worried about paying the rent, so addressing financial realities needs to come first. If you are married or in a relationship, start with a conversation about budgeting and time management.

In a new Florida State University study, more than 33 percent of couples reported discrepancies of greater than six months in their perceptions of how long their money would last post-layoffs. The study suggests that husbands and wives are not always on the same page in their views of financial status or long-term economic viability.

"Both people need to know how quickly the faucet is going to run out," says Wayne Hochwarter, a management professor at Florida State's College of Business. "Often there's a bit of disconnect there."

Indeed, Pero says that has been his biggest challenge living off severance. His wife is working in a school. Though the two agreed to cut all discretionary spending, it took some working through to agree to cancel a spring break trip with their son.

"She's more fiscally conservative," Pero says. "We've had to get on the same page with our panic level and sanity level."

The financial equation

To start, figure out what your former employer owes you, your unemployment pay, and income from other workers in the family. Anyone receiving severance may also receive unemployment benefits, up to 26 weeks, and in some cases, extensions for another 13 weeks.

Next, list necessary expenses and eliminate the unnecessary ones. Compare your income to expenses to get an idea of how long you can survive. Think needs like food, not wants like cable television. Consider shopping around for low-cost health plans that are more affordable than continuing employer coverage under COBRA.

Financial planner Andrew Horowitz advises putting your severance into high-interest money market accounts rather than a certificate of deposit.

"Under no circumstance should you do anything with your severance package other than put it in a safe and liquid place," he says.

Horowitz says in some cases, he even advocates spending — on technology. "Better technology gives you better reach to find a job or stay connected."

If you know you're going to fall behind on your mortgage, car or credit card payments, contact your creditors in advance. They might be willing to work with you.

Financial planner Charles Sachs of Evensky & Katz cautions against acting in panic as severance runs out. Take a loan on your credit card only as a last resort, he says: "If you will start a new job in few weeks, it's okay to borrow and pay high interest. But if you have no idea when new money is coming in, don't do it."

Joe Ankus, a legal recruiter, says he's flooded with calls from out-of-work lawyers living on severance. "Some already have gone from filet to mac & cheese," he says, "but others still don't get it. They are deceiving themselves by thinking there will be a quick fix."

Ankus says he urges less-experienced lawyers to use their severance to reinvent themselves — take classes, pursue a new career, learn new skills.

Leslie Padilla isn't ready to switch careers but she is making some drastic changes. Padilla had been with Comcast six years when she was laid off in January. The public relations professional says it took her two months, while still employed, to digest the news. But as a single mother living on five months' severance pay, she moved into action.

She came up with a budget and slashed expenses. She cut her nanny to part time, sharing her with another laid-off mom. She also moved in with her mother and swaps hand-me-downs with friends. Her nights are devoted to job hunting online.

One thing Padilla refused to cut was the cost of networking. She regularly takes contacts to lunch and attends networking events. And she has taken advantage of the career counseling service Comcast provided to update her resume and print business cards at her former employer's expense.

"It was hard to get my head around it at first, but I have to plan for a long transition phase," she says. "At this point, it's about riding it out."

Laid-off workers struggle to survive on severance pay 06/13/09 [Last modified: Saturday, June 13, 2009 4:31am]
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