Laid off, debt climbing, what now?
Set up a short-term income strategy with savings, says Alan
By Alan Klayman
Welcome to the inaugural column of "Maturing Loans," a weekly column designed to answer questions and address credit card needs and issues as they apply to retirees and baby boomers getting ready to retire.
Dear Maturing Loans,
I am a 52-year-old single dad who lost his job six months ago. I am an executive who has worked all his life and supported his family. I have never been laid off before and it's been really tough finding a comparable position and salary. I have substantial savings (around $400,000), but I don't want to touch that as it's slated for retirement and college expenses. My unemployment covers the rent, but that's about it. I've been charging gas, groceries and stuff in the meantime and hope that once I get a job, I'll be able to pay off the credit card debt. My question is how much do you think is too much to charge? My credit card balance is creeping near the $10,000 mark. Should I bite the bullet and start dipping into my savings or what?
We may be able to eliminate using the credit card completely. The first thing you need to do is figure out how much you need to live on. Once you know this number, then you need to see if you can cover that number during your job search with part-time work. That may or may not be feasible during your job search, depending on your unemployment eligibility and the time necessary to complete your job search. If it is not feasible, then you need to construct an income strategy to get you through this time. There are a lot of variables here and I'm not sure which fits your situation best, so let me explain the different choices you have.
You can set up a short-term income strategy to pay you the income you need to cover the gap in your expenses. One variable is that we don't know how long to set this up for, since you don't know how long it will take to get a job. If we set up a plan for just a few years, we may (depending on how much income you need) be able to cover your income, and actually grow your $400,000 to cover inflation. Another variable is the 'type' of money you have. If you have a lot of 'nonqualified' money (money not in an IRA or 401(k)) then this is easy. If you have a substantial portion of money in qualified accounts (IRA, 401(k)), then we can look at IRS rule '72t'.
Under this IRS rule, you can take substantially equal periodic payments (SEPP) based on your life expectancy for 7.5 years (through 59 1/2) and not have any penalty on your qualified accounts. So we would need to set up a strategy to last through 59 1/2. The downside, of course, if your money is mostly in qualified accounts, is that you have to take the income even if you have found a job. The upside is that if it takes years to find the right job, you are receiving the income you need, not paying a penalty, and may be able to grow your nest egg. Make sure you speak with your CPA to set this up properly.
If we are able to generate an income by using your savings and investments, then part of your budgeting should be to systematically pay down your credit card debt. First, put your debt on a card with the lowest annual percentage rate. Then start paying down the debt to completely eliminate the principal. The point here is to try to minimize the interest payments, which in turn will lower your debt, and will lower the payment amounts over time. This will give you, whether you are working or not, a smaller number in your expense column, and in turn more money from your income for you and your children.
We are going to try to stop using the credit card by:
• Seeing how much income we need.
• Speaking with a financial professional to:
• See if we can generate the income needed.
• If we can, then set up an income strategy for a period of time.
• Speak with your CPA if you have a lot of money in tax-qualified accounts then look at using the under 59 1/2 rule (72t or SEPP) to be able to utilize the assets without penalty.
• Move balances to your card with the lowest APR.
• Budget to pay down credit card debt (tell your financial professional to put this in your income strategy).
• Systematically pay down the debt, which lowers your future expenses.
See you back here next week, ready to answer your questions.Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.
Published: April 2, 2008
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