Q. I just became unemployed from the downsizing of the telecom industry. I want to know how to manage my resources wisely. I have about $150,000 in 401(k) assets, all in growth funds. I also have $10,000 in cash and $10,000 in a CD, earning 5 percent. I also have $1,200 a month in unemployment insurance.
I owe $75,000 on a 6.375 percent mortgage with a $1,000 payment, a $5,000 car loan at 5 percent with a $400 payment, and no credit card balance.
For the next 3 to 9 month job search should I borrow from my 401k, get a home equity loan, sell the house and move into a two bedroom apartment, cash in the CD, use the credit cards until they max out, then use the cash on hand? What resources should I use first to minimize the damage?
---H.B., Dallas, TX
A. The first thing you should do is breathe a sigh of relief. Whatever your anxiety, you are better prepared for unemployment than most people. Many of the recently unemployed have major credit card bills, car leases, and other obligations. Worse, they often have no assets to offset those expenses.
If we knew you'd be reemployed quickly--- and at the salary needed to support your obligations--- it would be easy to suggest drawing down your cash. As it is, you face an unknown period of time.
The biggest mistake that most people make when they are unemployed is overly optimistic assumptions about re-employment. This allows them to avoid cutting expenses and prevents them from putting their house on the market. By the time they act they may be facing a foreclosure and personal bankruptcy.
Here's what I suggest.
• First, lock up your credit cards. Use cash. It will help you reduce your
spending.
• Second, take a hard look at your car. Do you have enough equity in it to
pay cash for a replacement? If so, sell the car and eliminate the $400
payment.
• Third, establish a tight budget and stick to it. If you know how much
you spend a month and how much you have in unemployment insurance,
you can calculate how long your $10,000 in cash will last. You can
also figure that your $10,000 CD will double the time. Make living
well on less a creative challenge. Check the bookstore or library
for books on living well on less.
• Fourth, consider selling the house, particularly if you don't have
children. If you are single, you'll be able to adjust relatively
quickly to an apartment and your expenses will fall dramatically. It
may be better to sell the house now than to try and sell it later. The
supply of houses for sale will increase each week until the economy turns
around. Proceeds from the home sale will be tax-free, will increase your
cash supply, and will put you in position to buy a house later.
• Finally, use your 401k as a last resort because of the taxes and
penalties on early withdrawals.
Q. I have some 401(k) money with Alger Growth Retirement Fund, which has a good 5-year average return and good category ranking according to Morningstar. In light of the WTC attack where this fund lost both its managers, do you think it would be wise to transfer this investment? If so, should it be done now or when the market levels out… whenever that might be?
---TR, by e-mail
A. That's a tough one but it's not for me or you to answer--- it will be up to the plan sponsor to decide whether to replace the fund and, if so, whether it should be replaced from the Alger group of funds or another fund family. I suggest holding pat and waiting. If the fund starts to sag relative to its category, move. You can check the performance of the fund relative to its peers on a daily basis by visiting the Morningstar website, "funds" section, and checking the "category performance" figures.
You might also visit the Alger Funds website and read their letter to clients.Another thing you can do is read an article about the firm in the November issue of Kiplinger magazine. According to the article, analysts who survived cover 88 percent of assets under management.
