By Kate Ashford
The numbers are staggering: A quarter of U.S. homeowners currently owe more on their home than it's worth, 14.6 million people are unemployed, and the stock market lost 50 percent of its value last spring, causing the retirement accounts of millions to nosedive. Meet three families who faced tough financial times and came out the other side, and find out how you can too.
"I was unemployed for months-without much in savings."
Marcia Delgadillo, 48, had been the sole wage earner when she was laid off from her marketing job in January 2009. Her husband, Holvis, was in grad school full-time; if he'd dropped out to look for a job, it would have sent him back to square one. "In his program, he couldn't just pick up where he left off," says Marcia. With two kids, ages 12 and 14, times were lean. So the Delgadillos, who live in Richmond, California, cut expenses and tapped an existing home equity line of credit (HELOC) to bridge the gap. "We maxed it out," says Marcia. After five months of scraping by, she was offered a job-at 30 percent less than she'd made before. Marcia accepted the pay cut. "I got this job just in time," she says. "Things are back on track now."
About 45 percent of unemployed Americans have been out of work for 27 weeks or more-what the U.S. Department of Labor considers "long-term unemployed." If you're one of them, follow this advice.
What to Do Immediately: Forget About Paying Down Debt
And going out to dinner. And HBO. In this economy, there's no telling how long you'll be looking for work, and unemployment benefits don't last forever, so you have to cut your spending to the bone. "Be honest about what is a want and what is a need," says Constance Stone, CFP, president and cofounder of Stepping Stone Financial, Inc. in Chagrin Falls, Ohio. If you were aggressively paying down credit cards before you got the pink slip, stop. Make the minimum payments (on time) and focus on conserving as much cash as possible.
As Your Savings Dwindle: Borrow (But Do It Wisely)
Intentionally taking on debt may seem crazy, but it's a better option than, say, losing your house or ruining your credit by not paying your bills. If your ends aren't meeting and there's no job in sight, it's (gasp!) OK to pull out the plastic for essentials like groceries. "Tapping credit cards is better than taking out a loan, presuming you're not maxed out and you have the discipline to attack that debt once you get a job," says Sheryl Garrett, founder of the Garrett Planning Network and author of Investing in an Uncertain Economy for Dummies.
If you have access to a HELOC, as the Delgadillos did, you can also use that, but do so cautiously. "You will have to start making monthly payments immediately, regardless of your employment situation," says Stone. Credit cards are considered unsecured debt-so if you default, your credit's going to crater, but that's about it. A HELOC, on the other hand, is secured debt, meaning it's anchored by your house. If you can't make your HELOC payments, your home is at risk. Bad idea.
An even worse idea: digging into your retirement accounts, says Melinda Opperman, senior vice president of community outreach and industry relations at Springboard Nonprofit Consumer Credit Management. That's long-term money; with luck, this will only be a short-term situation. Not only will you pay income taxes on retirement money you withdraw, you'll also pay a 10 percent penalty if you're under age 59½ , and you'll destroy the cushion that's supposed to support you when you're 70. If money's short and you have no other options, you can pull your contributions out of a Roth IRA penaltyfree- but only if the money's been in there for five tax years. When you contribute to a Roth, you contribute for a particular tax year (the cutoff date is April 15 of the following year). Say you put $5,000 into a Roth IRA for the 2005 tax year. You could take up to $5,000 out in 2010 because five full tax years will have passed.
If You're Nearly Tapped Out: Take Any Job Offer
"When money's running out, you don't have the luxury to dictate terms," says Michael Kitces, CFP, director of research for Pinnacle Advisory Group in Columbia, Maryland, and coauthor of Tools & Techniques: Retirement Income Planning. The key is to generate income while you continue to look for a better job.
"We're upside down on our mortgage."
When Carrie Rocha, 34, founder of PocketYourDollars.com, and her husband, Marco, 44, a graduate student, bought their two-bedroom townhouse in a Minneapolis suburb seven years ago, they had no kids. Today they have two, ages 3 and 1½, and they'd like to move to a different area-but they can't. "We intended this to be a starter home," says Carrie.
They've tried to sell twice with no luck. Now they owe more on the mortgage than the house is worth. It's not as dire as some situations-their place is valued at $145,000 and they owe about $152,000-but after closing costs, they'd still be out more than $14,000 (if they even get full price). That's money they don't want to lose, so they're staying put and hoping to sell farther down the road.
It's not always easy to think positive when yours is among the 11.2 million homes with an upside-down mortgage. Here's how to keep your head above water.
What to Do Immediately: Stay Where You Are If You Can
Unless you absolutely need to move, there's no need to freak out. "If you can make the payments on your current home, keep doing it," says J. David Lewis, MBA, founder of Resource Advisory Services in Knoxville, Tennessee.
If You Must Move: Make Up the Difference
If what you owe on your mortgage isn't far from the home's value (as with the Rochas) and you need to relocate (say, for a job transfer), you have a decision to make: Either pay extra on your mortgage until you could break even by selling the home at its current value, or dip into savings to cover the shortfall when you sell, says Opperman.
In this market, you may get your new home for a bargain. So if you pay $10,000 out of pocket to sell yours and buy one for $10,000 less than it was worth a year ago, some experts might consider that a wash.
If You're Thinking of Renting Out Your Home: Think Long and Hard
This is certainly an option, but keep in mind that you may not be able to rent it for the cost of your mortgage payment, if at all. And if your renters flake, you'll still be on the hook to pay this mortgage and the rent or mortgage of the other property. Plus, a rental property may be more hassle than it's worth. "There's still care and upkeep necessary on the house," says Vicki Bott, deputy assistant secretary for single-family housing at the U.S. Department of Housing and Urban Development (HUD). "You need to be fully prepared to take on the responsibility of managing a rental."
If You're Contemplating Walking Away: Talk to an Expert First
If you're really under water-for instance, owing $400,000 on a home that's worth $250,000-you may be thinking about letting the bank foreclose and moving on. It's called strategically defaulting: choosing foreclosure even though you can make the payments. Before you do it, talk to a HUD-approved counselor. (See "Where to Go for Help," below, to find one near you.) It's a free service, and they can show you all your options-plus the downsides.
"There can be serious tax consequences to walking away from a home," says Clarissa Hobson, CFP, senior financial planning advisor at Carnick & Company in Colorado Springs. "The IRS could consider the canceled debt a form of income and hit you with a significant tax bill." Plus, a foreclosure will derail your credit score, which may prevent you from buying another home for years.
A short sale (selling your house to a buyer for less than the balance on the mortgage, if the bank allows it) is a less damaging option, but not by much. You'll probably still face a considerable tax bill and your credit score will take a large dive. If it's your only option, call your lender before soliciting offers. "Sometimes people list their home and wait to tell the bank until an offer comes in," points out Bott. "The best bet is to call your lender first to make sure you qualify for a short sale (the criteria will vary by lender), and to find out what they're willing to list the property for."
If you're facing involuntary foreclosure because you can't afford your mortgage bill, there's news for you: Both Bank of America and JP Morgan Chase have suspended foreclosure proceedings in 23 states (and GMAC has suspended evictions and post-foreclosure sales) due to possible procedural issues. Officials in various states are calling for an evaluation of all foreclosure processes after news surfaced that companies may have signed foreclosure paperwork without properly reviewing it.
"Our retirement accounts lost serious money when the market tanked."
Danny Kofke, 35, a special education teacher, and his wife, Tracy, 38, a former teacher who's now a stay-at-home mom, have been saving for retirement for years. They both have 403(b) plans, the teacher's equivalent of a 401(k). The Hoschton, Georgia, couple, parents of two daughters, 6 and 3, have also been socking away money into Roth IRAs every year. But when the market went south in 2008, so did their savings. "We probably lost between 30 and 40 percent, or roughly $6,000," says Danny. Unlike a lot of people, though, the Kofkes didn't panic, even though they were upset. They kept contributing every month and have seen their accounts recover much of their value. "Fortunately, we've been able to regain about $4,000," says Danny. "We just tried to remember that we're in this for the long haul."
If you watched in horror as your retirement fund took a plunge, try this advice to recover what you lost.
What to Do If You Haven't Made a Move Yet: Nothing
Believe it or not, leaving your accounts alone is your best bet. Don't stop contributing to your 401(k). Don't dump all your stocks for bonds. And absolutely don't cash out. Stay the course and you stand a far greater chance of watching your balance return to its former glory. "People who keep contributing will find that they'll break even more quickly than someone who stops contributing altogether," says financial planner Ted Toal, CFP, a senior partner at Rockwood Wealth Management in Annapolis, Maryland.
In fact, the one thing you should do is boost your contributions. "Clearly, the best time to buy is when the market is down," says Stone. Now that stock prices have fallen, your contributions will purchase more shares at a lower price. What's more, even if your account has recovered at least partially from the market crash, you may have lost your company match (a common casualty of the recession) so you're not saving as much as before. "A lot of firms cut back on that perk during the recession as a way to avoid laying off workers," explains Hobson. If your employer was matching up to 3 percent, raise your contribution by 3 percent-consider it a self-match, if you will. As an alternative, you can put that amount into a Roth IRA, suggests Stone.
Keep in mind that it's perfectly normal for your portfolio to go down if the market does. However, if your portfolio goes down by more than 5 percent when the market goes up, it probably means your investments aren't so great. That's when you should review your investments more seriously and possibly consider moving your money into something a little more traditional, such as an S&P index fund or a target date retirement fund, says Kitces. Both are better because they're fairly predictable.
An S&P index fund mirrors the performance of the S&P 500: Whatever the market does, your money will follow. And a target date retirement fund contains a diverse mix of investments that become more conservative as you near retirement.
If You Pulled Out: Jump Back In
Unfortunately, if you panicked when the market hit bottom and dumped all your stocks, you're going to have a harder time rebuilding your nest egg. "There's really nothing you can do once you've stepped out of the market," says Mary Lacey Gibson, CFP, founder of MLG Financial Planning in San Juan Bautista, California. You sold low, so buying back in now that the market has rebounded a bit means you're acquiring stocks at a significantly higher price.
But that doesn't mean you should stay out. Start contributing again to your 401(k), reinvest in stocks that are appropriate for you-and then be patient. Check your statements no more than once a quarter and rebalance once a year. "Looking at them constantly can make you feel as if you need to act," says Gibson. "Often that leads to making the wrong moves at the wrong time."
In the Future: Stop "Investing by Numbers" Only
Have you ever heard that you should have X amount in stocks and Y amount in bonds just because you're a particular age? Surprise: That's not always the best setup for some people. "I would put more weight in risk tolerance than I would in age," says Garrett. "Ask yourself how much risk you're comfortable taking." Your answer could lead to considerable gains.
However, don't totally disregard your age, especially if you're nearing retirement. You may be 55 and completely at ease with a high-risk investment, but be sure to weigh that against other factors, such as how much money you have saved elsewhere (is it enough to cover what you might lose?) and how many more years you plan to work (would you have enough time to earn back what you might lose?).
If you're not sure how much risk you can withstand, take a risk questionnaire. (Find them at financial websites like Vanguard.com and Fidelity.com.) Do several to see how they compare. Most will give you a stock/bond mix that matches the risk you want to take, and you can use that recommendation to adjust your 401(k) accordingly. If you have other investments (like an IRA), be sure to consider your 401(k) as just one part of your greater financial picture. And if it all seems too overwhelming, try a one-time fixer-upper meeting with a financial planner.
Where to Go for Help
Find free housing counselors who can answer mortgage questions and advise you.
Find fee-only financial planners who charge by the hour.
Complete the quiz to find out your financial risk tolerance.
Find out how to save money on local services like wireless phone, cable, gas and others.
Find legitimate credit counseling and financial education.
Original article appeared on WomansDay.com.
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