As layoffs rise, some financial advisers are encouraging their clients to come up with contingency plans in case they lose their jobs.
"I don't care how old you are; obviously, losing your job is a problem if you haven't accumulated money," said Barry Taylor, a certified financial planner and portfolio manager at Bingham Osborn & Scarborough LLC. The San Francisco-based firm manages just under $2 billion.
For boomers who are edging toward retirement, as well as younger people, a round of layoffs could devastate the most modest of nest eggs.
As the economy sputters, the ranks of the unemployed continue to swell. Last month, the jobless rate jumped to 5.7%, from 5.5% in June, reflecting the loss of 51,000 jobs, according to reports from the Department of Labor.
The bad news keeps on coming, as some 103,312 positions were scheduled for termination during July, up 26% from June, according to Challenger Gray & Christmas Inc., a global outplacement consulting firm in Chicago. Financial services firms lead in announced job cuts this year, with 100,775 layoffs through July.
"If you're looking for things to bottom out, it'll be sometime around the middle of next year," said Nigel Gault, group managing director of the North American macroeconomics service of Global Insight Inc. in Lexington, Mass. He predicts job cuts to continue in the financial sector, as well as in the consumer, housing, retail and automobile industries.
In order to keep clients' hands out of their retirement accounts, advisers have recommended that investors at least anticipate unemployment and build up a cash cushion that can cover three to six months of expenses. A cash flow reserve is a top priority, Mr. Taylor said.
If an individual hasn't saved much, a home equity line that is secured while the client is still working could act as a safety net.
"If you're worried about getting laid off, you'll want to make sure you can pay your bills," Mr. Taylor said. "You're going into debt, but it's better than losing your home."
Tapping the cash value of a life insurance policy is another emergency tactic when money is scarce.
All debts need to be prioritized too.
Normally, tackling high-interest credit card debt is a priority. But if cash dries up and the choice is the credit card bill or the mortgage, Mr. Taylor recommends that clients pay the interest only and concentrate their efforts on keeping the house.
"In a situation when the individual is strapped from a cash flow standpoint, it's not a wonderful scenario," he said. "But you need food and shelter first. Pay the debt that keeps the roof over your head."
Life insurance premiums can be deferred by switching to annual, as opposed to monthly, payments, depending on the policy and the provider.
Preparing for a layoff requires more than stashing away cash, advisers said. Those who don't prepare mentally and professionally for the worst are likely to be devastated when their jobs are eliminated and they face a slow recovery.
"The first thing to do is to get your composure and think of it logically: 'How do I turn this to my advantage?'" said Andrew V. Tignanelli, a certified financial planner and president of the Financial Consulate in Hunt Valley, Md.
When a client, who had worked for a Bethlehem (Pa.) Steel Corp. plant in Baltimore was laid off in the 1980s, he required a positive mind-set — along with his emergency nest egg — to make the most of the situation. Within two years of losing his job, this investor became a successful entrepreneur, Mr. Tignanelli said.
Regardless of how secure a client thinks he is at work, advisers encourage networking and staying marketable by brushing up on skills.
Of course, those emergency plans should be saved only for situations in which a layoff could be imminent — not when a client wants to opt out of a career.
"If you're burnt out on the job, this isn't the environment in which we'd encourage people to take a leap," Mr. Taylor said. "But if you think you're getting laid off, you'll want to look at being proactive."
As bad as the job climate is, advisers can recall even more-dismal times in decades past.
"This is nothing compared to the early '80s when people were getting laid off en masse or the early '90s when you had substantial layoffs in numerous categories because there were many mergers and takeovers," Mr. Tignanelli said.
E-mail Darla Mercado at [email protected].
