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A Crisis of Major Disruption

With nearly 30 percent of the workforce either unemployed or likely to become unemployed within the next year, huge problems could lie ahead for families throughout America for years to come. Potentially, trillions of dollars in employer 401(k) dollars are being unlocked.

Federal Reserve Chairman Jerome Powell believes millions of people will not “get to go back to their old job,” and there may not be a job in that industry for them for some time.

The enforced departure of people from their homes or workplaces is devastating to a family’s economic security. Now more than ever, people need financial planning help because bad situations can be made worse by making wrong moves with finances.

Unemployment and Job Displacement

My friend, Paul, 62, is an accomplished professional with two kids in college. He was displaced in April from a position he has held for almost 25 years. His wife, Jeannine, works part-time. Finding a job now, Paul says, is “difficult to impossible.” He is extremely troubled by the harsh reality of thinking his career and higher-earning days are behind him. The stress and emotional struggle clearly show on his face.

Paul and Jeannine need to know their options. Among other things, they need to review their budget and finances. They should also explore the new provisions in the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, and the options available in his 401(k). When I asked Paul about their spending needs, he gave me a “roundabout” figure. That signaled to me that he might need a bit of organizing.

The Economic Dominoes Will Continue to Fall 

When working with clients affected by unemployment and displacement, we have a slight edge. At Hefren-Tillotson, we continually harp on having an emergency fund to carry them through six months or more of living expenses in some sort of cash-like investment. Granted, having one and funding one are two different things. In their emergency fund, we want to see enough for six months’ mortgage and car payments, insurance, loans, household expenses, etc. If this seems like a lot, it is to some but not to others. The funding is built up over time. Replenishment, however, should begin when displacement ends. Paul and Jeannine should work with their lender to temporarily provide some payment relief.

One benefit of the previous lockdown is that people have slowed down their spending, so this is probably a good time to redo the budget anyway. You might not realize you were spending $2,000 a month less than before, making this the nut you need to crack now. Once you have that monthly number and know what your new spending rate is, you can look at other resources to determine what your options are.

If you don’t have an emergency fund, or $10,000 sitting in the bank, look at the money you do have in a brokerage account, and in qualified accounts such as 401(k)s and IRAs, where money hasn’t been taxed. If you are uncertain as to how long you’ll be out of work, as most people are, and you are close to retirement, creating a plan for early retirement makes sense. If not, I can create a financial bridge, and show you how to navigate it, until you get a job and return to making a comparable wage.

Light at the End of the Tunnel

As a result of the CARES Act, and the extra $600 per week to unemployment compensation, some folks had much-needed cash in the short-term. It doesn’t last long, and other options should be explored.

Regarding taking money out of your 401(k), I would say, “Do not touch it.” However, (there is always a ‘however’) if your back is against the wall, and you are under the age of 59½, you are not subject to mandatory federal withholding tax or 10 percent penalty tax thanks to the CARES Act. The income tax can be spread over a three-year period. And if your income is going to be lower for the next few years, you can declare some of that distribution.

Here is an important question: How has this distribution impacted your longer-term goals? MASTERPLAN® puts it all in writing for you. The idea is to make the best decisions now and without emotion and confusion.

If you are interested in how Hefren-Tillotson can help you, and anyone else you know who is currently displaced, please let me know. We can aim to provide clarity to what might appear to be a murky road ahead.  

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills. MEMBER SIPC.