How to survive 5 recession hardships

By Kiplinger's Personal Finance Magazine

Many Americans have been affected by the recession -- but not all in the same way. Some face mortgage troubles and owe more than their houses are worth. Others face job layoffs. And in a tough economy, budding professionals face a land of less opportunity.

To provide the most valuable insights and resources for surviving this recession, we take a look at the most common hardships -- profiling a real person and then offering practical steps anyone can take to lighten the burden.

'I lost my job'

Cliff Heaton was stunned, but certainly not alone, when he became a "mass layoff" victim in January.

Mass layoffs occur when companies cut 50 or more employees at a stroke, and in January more than 2,000 companies made such cuts.

Why is a mass layoff so bad? If you're caught up in one, you'll have to find work in an economy in which hundreds or thousands of people with similar skills have just re-entered the job market, too. At the end of February, 12.5 million Americans were unemployed. What's even more disheartening is that so many occupations have been affected.

Heaton, 43, of Yardley, Pa., worked for a national market-research company. He had an inkling that his job was in trouble, given that he specialized in research on the crumbling financial industry. "Still, the layoff was very sudden, and this environment is scary," he says.

• Survival guide for the unemployed

From a financial standpoint, though, Heaton and his wife, Katie, have done everything right. The couple's prudence before his layoff means they have no debt outside their mortgage, and, he says, "we've been a bit cash-heavy lately." That's an understatement. Due in part to some farsighted coaching from financial planner Jonathan Heller, the Heatons have banked 16 months' worth of income. In normal times, says Heller, he'd recommend three months, "but these aren't normal times."

Because of their savings and because his wife works, Heaton has bought some time to look for his ideal job. He says he's "still in the optimistic phase." But he's not kidding himself about the job market. "In a couple of months, I'll start looking for something less than ideal."

What you can do in the face of a layoff:

• Save five months of expenses. While you're still employed, build up your savings. Among laid-off workers, the average time spent unemployed is five months for those 45 and older, and four months for younger workers. Try to have enough cash on hand to comfortably cover your expenses for at least that long.

• Set up a line of credit. Also, set up a line of credit you can draw on. If your home hasn't lost too much value, a home equity line is one option, and low-interest credit cards will work in a pinch. And don't wait till you're unemployed to begin networking.

• Don't take a break. If you lose your job, start looking for work immediately. John Challenger, the CEO of outplacement company Challenger, Gray & Christmas, says times are too tough to dally, even if you have severance pay.

• Network. Contact other unemployed people, join a job-search group specific to your industry and get coaching. High-priced outplacement companies that help with résumés, interviewing skills and networking are fine if you can afford them, but try lower-cost providers, such as Five O'Clock Club and Gray Hair Management. -- Bob Frick

Continued: 'Underwater' homeowner

'I owe more than my house is worth'

When Michelle Jacobson and her husband bought a new three-bedroom house on an oversize lot in Las Vegas five years ago, she thought they had it made. The house, which had granite kitchen countertops and a casita for their two children, was in the right school district. It had walk-in closets. And although it was a bit pricey at $287,000, it looked like the perfect place to settle down.

"We thought, 'We can't lose,'" Jacobson recalls.

So the 37-year-old real-estate agent and manager of apartment buildings put down some roots. She and her husband acquired an interest-only loan (a loan that allows borrowers to pay only the interest for a specified period) with a fixed rate of 5.875% from Countrywide Financial. Then they got to work on some upgrades: a pool with a rock waterfall for $40,000, ceramic tile floors for $6,000 and customized closets for $2,800.

When the house was appraised for $500,000 just more than three years ago, the improvements looked like a smart move. But that was then. Before long, the market turned -- big time. In fact, Nevada was the worst-hit state in the country because of a buildup of speculative construction. Home prices there plummeted.

Recently, Jacobson says, their house was appraised for just $230,000. But their mortgage balance is $364,000, so the home she initially thought would be a good investment is instead underwater. As of the end of last year, 20% of all mortgages nationwide were in the same situation, according to First American CoreLogic, a Santa Ana, Calif., company that analyzes real-estate trends.

Jacobson's neighborhood is no longer as appealing as it once was, dotted by foreclosures and an increasing number of break-ins (see "Foreclosure nearby? It's your problem"). She would like to move her family, but they have few options. If they could sell the house for its appraised value, they'd owe the lender more than $130,000 -- money they don't have. Renting it would bring in only about half of the monthly mortgage payment of $2,250.

Jacobson is worried about what a short sale (meaning the lender accepts a price that's less than the mortgage balance) or a voluntary foreclosure would do to their credit scores, which are currently in the upper 700s. Plus, if the house went into foreclosure, she and her husband wouldn't be able to buy another home for several years.

• Personal tales: Saved from foreclosure

On the other hand, if they stay in the house, they won't be able to pay back the loan in full after their 10-year interest-only loan comes to an end in four years. "We are in a desperate situation -- we could lose our house," Jacobson says.

Jacobson thought they could refinance their mortgage to get some wiggle room. Not a chance. Because their home is worth less than their loan, the refinance is considered high-risk. And when she called Countrywide to ask about modifying the terms of the loan, she was told they had to be three months behind on their mortgage payments to qualify. They're not -- and don't want to be.

• Help for on-the-brink homeowners

The Jacobsons' next step is to check with a housing counselor certified by the U.S. Department of Housing and Urban Development to see whether any options remain. But they might not be able to find relief from the Obama administration's housing program, which is likely to limit help for borrowers who are deeply "underwater."

If you, like the Jacobsons, owe more than your home is worth, here are some things that might help save your home:

• Call your lender. If you owe more on your mortgage than your house is worth, get in touch with your lender to see whether you qualify for a loan modification.

• Contact a counselor. If that doesn't work, contact Hope Now for free assistance on how to prevent a foreclosure. A coalition of HUD-approved counseling agents, investors and mortgage companies, Hope Now will help you come up with a plan of attack. Another good resource is a HUD-approved housing counseling agency.

• Try Uncle Sam. More homeowners will qualify for assistance under President Barack Obama's Making Home Affordable program, which includes an option to refinance that you can use if your mortgage is backed by Fannie Mae or Freddie Mac. It also has a loan modification program to help reduce payments. Under this program, the lender would reduce monthly payments, and Uncle Sam would kick in funds to lower them further. The Treasury Department has set up a new Web site to explain the program. -- Laura Cohn

Continued: Retirement savings evaporate

'My retirement savings are gone'

Douglas Paddock always thought he'd retire at 55. But having recently reached that milestone, he has yet to put down his briefcase. Paddock changed his plans after losing a chunk of his retirement savings during the market meltdown last year.

Paddock now hopes to quit his day job in three years. And a crucial part of his new plan is powering down his expectations. "Through the years, I've come to see that being satisfied in retirement means being satisfied with less," says Paddock, who lives in Wilmington, N.C.

Like many baby boomers, Paddock, a vice president of financial planning at BB&T bank, has delayed his retirement after watching his portfolio shrink by 30% to 40%. According to a survey by Bell Investment Advisors of Oakland, Calif., 60% of boomer investors have put off retirement by one to four years because of the plunge in the market. To cope with the setback, 78% of those surveyed plan to cut spending as well.

Cutting spending to increase savings is also part of Paddock's plan. To track expenses, he and his wife, Meyka, have started using personal-finance software. Meyka, a 48-year-old tax preparer, plans to join him in retirement in three years, and they hope the program will help them save more. Already, it has helped them cut spending in categories such as eating out and entertainment. "What's critical for us in the next three years is maximizing our savings," Paddock says.

As they clamp down on their expenses, the Paddocks will keep contributing to their retirement plans, which include 401(k)s, Roth individual retirement accounts and a SIMPLE (savings incentive match plan for employees) IRA. By maintaining their contributions, the Paddocks share the approach of most investors. In an analysis of more than 3 million investors, the Vanguard Center for Retirement Research found that most participants in employer-based plans are still socking away money for retirement -- and investing in stocks.

Paddock is philosophical about delaying his goals. "A couple of things have changed my perspective," he says. For one thing, last year he was diagnosed with prostate cancer. That, along with the realization that he probably won't recoup the losses in his portfolio, has made him appreciate the simpler things in life.

He and Meyka were inspired by friends to buy an old 30-foot sailboat they found on Craigslist for $4,500. The boat, named "Miss M," after Meyka, provides an oasis of calm on the weekends, when they drop anchor in the local bays. "We now know we can be content with less," he says.

How you can rebuild your nest egg:

• Contribute. Always contribute as much as you can to your 401(k). In 2009, if you're 50 or older, you can put in $22,000. At that age, you can also contribute $14,000 to a SIMPLE IRA. Particularly if you're 55 or older, don't stop funding your retirement, says Debra Neiman, a financial planner in Arlington, Mass.

• Consider an annuity. If you've lost a big part of your savings, consider an annuity that guarantees minimum payouts regardless of the market's performance. You could get a 6% payout per year for the rest of your life no matter how the investment performs. If it does well, you could cash out after the surrender period -- typically three to seven years -- and invest it in whatever you want. But the fees for these guarantees can be steep. You can compare annuities at Annuity Grader.

• Monitor your savings. MSN Money's Retirement Planner will help you determine whether you'll have enough. -- Laura Cohn

Continued: Buried in debt

'I'm buried in debt'

Laurie Redmond thought she was making a smart decision when she quit her job in 2005 to become a mortgage broker. Her company, a large bank, had recently been bought out, and layoffs were imminent. Rather than compete with hundreds of other job seekers in the same profession, she says, "I jumped ship before I got laid off."

Until then, Redmond, of Wilmington, Del., had been prudent with money. A single mother, she earned a good salary and spent less than she made. Her savings included several certificates of deposit and a money market account totaling about $7,000; a $2,500 savings bond for her toddler, Cindy; and another $7,000 in a 401(k). She paid off the balance on her two credit cards faithfully every month.

The new job, which was based entirely on commissions, was "the biggest financial mistake of my life," Redmond says. Over the next 12 months, as home sales and mortgage lending were beginning to plateau, she earned $16,000 -- less than a third of her former salary -- and shelled out more than $1,000 a month in marketing expenses. Months went by when she earned no commissions at all.

Determined to make the job work, "I hit my savings," says Redmond. During that year, she ran through all of it, then turned to credit cards. Redmond ultimately maxed out eight cards, to the tune of $23,000. She couldn't make the monthly minimum payments, much less cover basic living expenses.

"I was waiting for my child support so I could pay my rent. I was out of available credit to pay for food. That was when I went in and talked to my boss. I said, 'I'm out of money. I can't do this anymore.'" Redmond resigned.

She eventually found a salaried job in a mortgage-related field and began chipping away at the debt mountain. "I was convinced I would pay it off myself. I paid hundreds and hundreds of dollars as soon as I got my job. My balances were going down, but it was a slow, grueling process."

In January 2007, Redmond turned to ClearPoint Financial Solutions, a national network of credit counseling services. Such agencies offer counseling and budget advice, as well as debt management programs that help clients work out a repayment schedule at lower interest rates. ClearPoint provides the counseling for free and charges $35 a month for debt management. The company set up an arrangement that brought down Redmond's interest rates and gave her a single monthly payment of $375. She had been paying $1,200 at the peak of her crisis.

Now, Redmond has enough to cover food, rent and other living costs and to treat her 5-year-old occasionally. "I can take my daughter to the movies. I can buy her a toy she's desperate to have. I can be a middle-class mom again."

Redmond will be free of her remaining debt, which is down to less than $8,000, in about two years. Getting help from the service "brought some sanity back to my life," she says. "It is not something I would brag about, but it has made a world of difference."

What you can do to pay off debt:

• Start by setting a budget. List all sources of income and fixed expenses, such as mortgage payments, car payments and insurance premiums. Cut costs on everything else, starting with food, clothing and entertainment. Budget Web sites can help you categorize spending and identify ways to save. Two candidates: Wesabe and Mint.com.

• Ask your creditors to help. Call the toll-free number listed on your statement and ask for a supervisor with authority to negotiate a lower rate and reduced payments.

• Consolidate your debt to lower your interest rates and your payments. Borrow against home equity if you can because you may be able to deduct the interest on loans up to $100,000. (Caveat: If you fail to keep up with the payments, you could lose your house.)

• For help, sign on with a credit counseling service. These agencies help you set up a budget and clean up your borrowing habits. They also work out repayment plans and negotiate lower interest rates. Be aware that some credit services are more likely to rip you off than restore your credit. -- Jane Bennett Clark

Continued: Stuck at the starting line

'I can't get started'

Figuring out what you want to be when you grow up is hard enough, but record unemployment rates are making it even tougher for Generation Y. The unemployment rate for 20- to 24-year-olds was 13.8% in February, up from 9.5% the year before. For 25- to 34-year-olds, the rate rose from 5.3% to 9.8% over the same period.

Facing such a harsh job market, many young adults realize there's no place like home. Thao Tu has been reconsidering her future from the comfort of her parents' Los Angeles house. And while she craves independence, she's making the most of her parents' extended generosity. "I'm fortunate to have parents who support me," Tu says.

After spending 12 years working all kinds of jobs, from selling ice cream on Venice Beach in California to brewing lattes at Starbucks, she finally earned a bachelor's degree in biotechnology in 2006, when she was 30. That field didn't suit her, so now she's setting her sights on accounting. She's back in school to earn an associate's degree, and she works two unpaid gigs that give her experience in the field.

As rewarding as unpaid work might be, bringing in some cash is also important. For now, Tu needs to find work that won't interfere with school. She has applied for more than 100 office positions since July and gotten only three interviews, so she needs to broaden her search and consider, for example, brushing up on her barista skills.

Because Tu's parents are covering her living expenses, she could use the income from a part-time job to make a dent in the $15,000 of debt she has amassed on eight credit cards, all of which are currently inactive due to her spotty payment history.

"I just made stupid mistakes," Tu says. "But I would love to be debt-free on my credit cards. That's my first priority."

How you can begin:

• Network. Career consultant Vickie Causa says 80% of jobs are acquired through networking rather than through a headhunter or on the Internet. But Causa does recommend hitting the Web to take advantage of the professional-networking site LinkedIn, plus college networking programs and events.

• Pay attention to your credit. To make sure your credit is up to snuff, check your credit reports and FICO scores. At AnnualCreditReport.com, you can get a free copy of your report from each of the three major credit bureaus every 12 months. For $15.95, you can order your FICO scores at myFICO.com. As for student loans, you may qualify to defer federal education loans, even if you aren't in school, because of unemployment or some other economic hardship. Contact your lender to find out what repayment options you have.

• Find cheap health insurance. Not having a job often means not having health insurance either. But coverage for young, healthy adults doesn't have to be exorbitantly expensive. You can shop for moderately priced individual policies at eHealthInsurance, or find a local agent through the National Association of Health Underwriters.

• Save. The next step is to build up savings and an emergency fund. At FNBO Direct, you can open a savings account with just $1 and earn 1.9%. Or you could try SmartyPig.com, where you can earn 3.05%, specify a goal for savings and open your account to donations from friends and family. -- Stacy Rapacon

Published May 5, 2009