What if you lose your job #1: Severance pay

Hungry as we are for any positive economic news these days, we were pleased to see that the latest Labor Department figures show first-time jobless claims were down last week.

Of course, that’s little consolation to the 478,000 human beings reflected in that statistic, or, for example, the 1,000 full-time eBay employees whose termination was announced this week.

Over the next several days, we’ll be offering what we hope is some useful financial advice for people facing unemployment, drawn largely from the pages of the Consumer Reports Money Adviser newsletter. Today’s installment concerns severance pay. 

If your employer offers you severance pay, you might have a choice in how you receive it: either as a lump sum or in a series of payments, much like a regular paycheck.

Assuming your employer is likely to stay in business (which may require a leap of faith at the moment), you could do best to take the series of payments—if only to avoid the temptation to spend the money too quickly. Also, by staying on the payroll you might still be eligible to contribute to its 401(k) plan—a good thing to do, especially if your employer matches contributions.

You might also be required to take severance in installments if you continue other company benefits, such as medical or dental coverage.

If you go the lump-sum route instead and will be depending on your severance for living expenses, park the cash in a safe, relatively liquid place, such as a bank account or a money-market fund with check-writing privileges. The FDIC coverage on bank accounts was recently upped to $250,000 temporarily (until Dec. 31, 2009), but make sure your severance pay, when added to the money you already have in the bank, doesn’t put you over the limits. If it would, either deposit your severance into a different bank or ask your current bank about ways to restructure your accounts for full coverage.

Until recently, money market funds were not federally insured, although they have proven remarkably safe.  Now, money market funds that participate in the Treasury Department’s new Temporary Guarantee Program for Money Market Funds have an added layer of government protection. If you use a money-market fund, you can draw on it as needed or arrange a series of regular automatic withdrawals from it to your bank checking account to create something like a virtual paycheck. You’ll probably need both types of accounts because money-market funds often require that any checks you write exceed a certain minimum, such as $250. —Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

Comments

[Jake]

Being unemployed, do banks offer any type of assistance on mortgage payments?

I've also seen credit card insurance and mortgage insurance that talk about some sort of benefit if unemployed. What's that all about?

Besides for an unemployment check, are there other government programs?

[Kirk D. Nemer, J.D., SPHR]

See a Great Article titled "The 8 Biggest Severance Package Mistakes" http://www.careerprotection.com/severancepay.html

[Karen]

Money Market fund will only be FDIC insured if they were already in your account on September 19, 2008. Any amount deposited after than date will not be insured. The insurance will only last for three months.

[Susan]

Jake, Call the bank, call your credit card companies, call whomever you owe money to and ask them what assistance is available--and KEEP ASKING. They may temporarily cut your minimum payments, reduce fees, whatever is within their power. It is well worth it to keep your payments coming in, even a reduced rate, than to have you in a growing group of people not paying anything.

If your first point of contact isn't helpful, ask to speak to a supervisor or manager who may have more authority. You have nothing to lose and everything to gain.

Best wishes on getting a new job quickly!