It’s probably a bit late to batten down the hatches, since the perfect storm has already made landfall. On the other hand, I wasn’t really expecting to get laid off, and now that looks like a strong possibility. So, today I’m taking a series of steps to help weather bad times. Some of these, I think, apply to just about anyone in most situations. Here’s some plywood to nail over the windows:
1. Pay off or be in a position to pay off debt
My strategy: Prepare to pay off $21,000 Renovation Loan
This is a second mortgage, not an equity loan, but because it is a loan against my house it does put me at risk of foreclosure if I can’t make the payments, which I will not be able to do if and when I lose my job. I already have $11,000 in cash savings snowflaked for this purpose. Along these lines, I moved $5,500 out of short-term corporate bonds and $5,000 out of Vanguard’s Wellington fund, the two non-retirement funds that are losing the least.
2. Identify all potential cuts in budget and prepare to implement them.
My strategies:
• Pay off the Renovation Loan, to save $374/month (the regular payment plus payments toward principal made to eliminate the loan by the time I intended to retire).
• Cancel the newspaper, cell phone, DSL (good-bye Funny about Money!), long distance service, and monthly yard clean-up. Savings: $139/month.
• Cash out the whole life policy. Savings: $30/month. This also yields $23,000 less 28% tax = $16,560 in cash, about six months’ worth of living expenses.
• Quit putting $200/month into a savings account for casual expenditures. Cut all indulgences to zero.
• Cut back budget for all other living expenses that are not regularly recurring bills.
These maneuvers will cut my monthly recurring bills from $821 to $482 a month:
As a practical matter, I probably will not cancel the DSL, since I need it for my freelance editorial business. Also, Funny is now getting about 6,000 hits a month. It may be worth monetizing it. If I did that, I would have a good argument for deducting the cost of DSL from my income taxes. It’s not much, but every little bit helps.
I could, in theory, cancel my homeowner’s insurance, saving about $65 a month. However, that’s a risky move. We’ve already seen that the minute I jacked up the deductible I darned near set fire to the kitchen. Murphy’s Law suggests that if I cancel the $780/year hit for homeowner’s insurance, a gigantic storm will come through, blow off the roof and, in a single lightning strike, burn down whatever remains.
With the monthly self-escrowing for principal payments and the monthly $200 general savings gone, monthly savings set-asides drop from $704 to $300.
I budget $1,500 a month for nonrecurring living expenses. If I’m very careful, do not indulge myself in anything, have no vet bills, and have no repair bills for the house or car, this amount can be as much as $300 more than needed. So, I’m figuring about $1,200 is what I will need each month to live on, above and beyond the costs of running the house.
3. Figure how much will be needed to live in reduced circumstances.
My strategy: Add up projected reduced savings, monthly bills, and budgeted “other” living expenses.
Okay. That’s better than the $3,000 a month I’m spending now. Over a thousand bucks a month better.
4. Try to figure out where the money will come from.
At the rate the market is going, I’m assuming there will be nothing left in my retirement savings. If I use the $23,000 that will come from cashing out my whole life insurance policy as an emergency fund to cover such things as veterinary, car, and house repair bills and to cover the $5,050 a year cost of COBRA, then I’m left with this:
My strategy: add up the next year’s sources of spendable income.
This assumes the tax on Social Security will only be around 20%, but it may be significantly higher, since I will have earned my regular salary for ten months of the 2008.
The RASL (amount GDU has to pay me for accrued sick leave) and vacation pay figures are net.
As you can see, even with the RASL pay and the one-time vacation time payment, I’ll come up short at least $6,600 in my first year of enforced retirement. It’s possible that I might be able to net that much with freelance income—a typical freelancer earns about $10,000 a year, working full-time.
If I don’t get a job, I am going to be in deep trouble. But I probably can get something working at a WalMart or even cleaning house. The rich will always be with us, and they’re always in the market for servants to do their menial work.
5. Consider whether there are any other options
My strategy: Figure what happens if I try to live on cash savings for the next couple of years.
If I don’t pay off the Renovation Loan but instead use the $21,000 cash savings and the $23,000 that will come from cashing out my whole life insurance policy, then we come up with a survival fund of $44,000. We have to add $170 a month back into the monthly cost of living. RASL is good for three years. The vacation pay is a one-time thing, affecting income in only one year. Without vacation pay, my shortfall will be around $10,000; without RASL and vacation pay, it will come to around $14,000.
As strategies go, living on principal is less than ideal. I suppose I could do it if I were pushed to the wall. But selling the house and living out of the back of the van would keep me going longer.
6. Count blessings.
My strategy: Quit focusing on the tsunami’s roar and pick flowers by the roadside.
• At least I have a roof over my head and the resources to pay it off
• No mortgager will be able to evict me from my home.
• It will take the county tax assessor two or three years to put me out after I begin to default on taxes.
• M’jihito has a job and is young enough to recover from whatever happens to this country, assuming anyone in the sub-Richistan classes can recover.
• I have a nice paid-off van with plenty of room to sleep in.
• I know how to cook from scratch.
• Beans are delicious and I know lots of ways to cook them.
• The veggies I planted have started to sprout.
• My health is good and so I at least can work, if I manage to overcome the prevailing cultural bias against older people.
• The Copyeditor’s Desk is getting steady work and could (maybe) crank $10,000 or $12,000 a year for each of its principals.
• They haven’t canned me yet.
• It’s fall and so I won’t have to run the HVAC system for another six or seven months.
• The weather is drop-down dead gorgeous.
• The dog is unfailingly cute.
Update, December 2013: As it developed, my estimates of the taxes were overblown. My job lasted until December 31, 2009, and so salary from GDU did not trigger a tax on Social Security, which I started drawing in 2010. Only a portion of one’s Social Security is taxed, and that’s only if you earn more than a certain minimal figure. As it developed, forming an S-corporation ensured that would not happen and sheltered most of my freelance income and all Social Security income from taxes.
After the layoff finally came, more than a year after this post appeared, it proved impossible to find another job. Even had the job market not dried up in the Great Recession, my age worked against me — employers wouldn’t give an old lady a second look for positions that read like they were written with my skills and experience in mind. By that time, though, I had already paid off the loan, cut my living expenses significantly, and made arrangements with a community college to teach the maximum allowable number of courses on an adjunct basis. Although adjunct pay works out to something less than minimum wage, between that and Social Security I managed to stretch a $14,000 emergency fund to cover five years, and then some.
By staying put in the market, I eventually managed to recover most of the losses in retirement funds. Five years later, total savings (including the whole life policy, which I never did cash out) are about where they were before the crash of the Bush economy. My son and I spent several years underwater on the house he and I copurchased, while he worked a miserable job at a company that overtly abused and grossly underpaid its workers. Today his house is worth what we owe on it and mine is worth what I paid for it. He has a better job and hopes for a promotion. I will never work for The Man again, and am glad of it.
