Emergency fund almost depleted

[dwk]

DW and I are 52 and have live below our means for quite a while. We had an emergency fund of $50,000. No debit except for mortgages on primary and rental property. And have maxed out 401K's, and saved 20% of our income.

2 years ago, DW was diagnosed with metastatic breast cancer and is unable to return to work. Her physicians are supportive of her going on disability. But our government feels she could be a greeter at Wal-Mart and has declined her application for disability. We have obtained an attorney who feels this should be a rubber stamped approval and have contacted our senator to enlist her help. But the government machine is moving so slow... social security states they don't have enough workers to process the applications -- so her request for appeal sat on someone's desk for 3 months.

The lack of my wife's income/ disability has resulted in the emergency fund taking a heavy hit.

We were on target to retire at 55, but a couple of events are going to delay the target date. In 3 years, I was going to retire from a large pharma corp with a decent pension and health benefits. Last month, our division was restructured and 60% of the sales and marketing group was told they weren't needed anymore -- and I was one of the casualities. So I'm going to lose my retirement health benfits. I do get a severence package for 7 months and can take a lump sum distribution in 3 years. I should be able to use the severence pay to payoff the mortgage for our primary home -- provided a find employment within the next 2 months.

Last summer, my wife and I decided to downsize and try to simplify our lives. We signed a contract on a two bedroom condo -- that would leave us mortgage free. Due to the down turn in the real estate market -- houses are sitting on the market for 6-9 months. I have priced the house very aggressively, but this time of year is tough for selling. We have 1 serious prospective buyer, who is coming to look at the house for a 3rd time. My agent assures me the house will sell -- the weather just need to turn warmer -- and I do think the house with sale.

My short term problem is the emergency fund is almost gone -- I have a house on the market that has not sold and the condo's completion date is the end of April. I have $350,000 in my retirement fund, that I may end up taking a loan against to purchase the condo.

I'm interviewing with another company tomorrow, so I'm not worried about having a job and steady income stream -- I fairly confident I'll land this job -- seeing how they called me.

Short of having my wife get approved for disability and someone buying our home in the next two months -- what are some of the other options that I could consider.

Thanks in advance for any comments.

dwk

 

[DangerMouse]

DWK

I don't really have a lot of advice to offer, seems as if you have been through so much.

Has the attorney given you any guideline as to how long SS will be able to drag out their decision making process?

What would it cost you if you withdrew from the purchase of the condo? Would it be worth taking a loss there and remaining in your current residence until the market recovers?

 

[youbet]

Lots of bumps and jostling in your lives right now. My best wishes that things settle down health-wise and job-wise. There seem to be so many variables in life you can't predict no matter how much planning you do.......

You mention that the $50K emergency fund is about gone and that you have $350K in a retirement fund, which I assume is deferred money. Where is the 20% you had been saving beyond funding your 401K's?

Is your rental property generating a positive cash flow?

What were your plans to pay for the condo before you lost your job given the possiblility of you current home not selling before the closing date on the condo?

Have you put together some hypothetical budgets covering the various scenarios quantifying how much you need and for how long?

Would it be correct to say that if you get another job promptly, DW begins collecting SS disability in a year or so (takes a long time), the house sells and your severance leaves you owning the condo free and clear, all is OK, at least financially?

Sorry, I'm all questions and no answers at this stage.

 

[alphabet soup]

I'm sorry for all the misfortune. In a civilized country, a family wouldn't face impoverishment when beset by life-threatening illness.

I hope it all works out.

 

[My Dream]

I also hope it works out and please keep us posted.

 

[Tracy42]

Very sorry to hear about the turmoil in your lives.

Regarding SS, this appears to be an increasing problem across the country. In our local office, the wait time from filing the appeal after the initial denial to getting a hearing scheduled (assuming they deny the appeal and you have to take the next step to request a hearing) is running 22 months. In 2004 the wait time was 1 year. I heard something crazy the other day that the SS administration is only hiring 1 replacement for every 12 people that leave through retirement, termination, etc. Based on what I've seen with the backlog of disability cases, I can believe it.

What about a home equity line of credit and/or refinancing your home to get some cash out while you wait for the sale? Best of luck to you.

 

[rogerc1944]

So sorry you are going through so much employment, financial and emotional strain while confronting cancer too. You are fortunate in having options to help get you thru this time of turmoil. If you are just facing a couple of month shortfall, maybe it would be best to just take out a line of credit with your bank or credit union. You could pay it back when you finally get access to your other funds. If you take out a loan against your retirement savings, it could create a problem when you leave your current employment. Any money you've borrowed has to be repaid when you terminate or it will be considered a distribution. Another problem is that money you borrow from a 401k is pretax money. The money you pay back is after tax money. While you pay yourself the interest on such a loan, you pay tax twice (the after tax I mentioned plus the tax you pay when you retire and begin taking distributions). To assist with cash flow, could your wife place her 401k money in an IRA and take it out monthly under the 72t provisions?

 

[free4now]

If you take out a loan against your retirement savings, it could create a problem when you leave your current employment. Any money you've borrowed has to be repaid when you terminate or it will be considered a distribution.

Usually but not always. Some companies will allow you to carry a loan on your 401k even after you leave.

Another problem is that money you borrow from a 401k is pretax money. The money you pay back is after tax money. While you pay yourself the interest on such a loan, you pay tax twice (the after tax I mentioned plus the tax you pay when you retire and begin taking distributions).

This is the main reason I usually tell people to avoid 401k loans, but if the OP is only going to borrow a few months worth of living expenses and will pay it back soon, this is not a big deal.

The biggest cost of short term loans is often the origination fees, so a 401k loan or bank line of credit might be your best option. Be careful about refinancing or taking out a second mortgage because those have high origination fees (or else prepayment penalties).

Best of luck.

 

[jazz4cash]

Considering the series of issues in your life, you seem to have a pretty positive attitude........that should see you through these difficult times. Good Luck!

You may be able to do a 60 day rollover from 401k to an outside IRA. Anything not rolled over within 60 days could be subject to 10% penalty for early withdrawal. There could also be 20% witholding, but another poster recently said the mandatory witholding won't apply for funds from an employer plan.

 

[rogerc1944]

Maybe I wasn't sufficiently clear. If you borrow money from a tax deferred account, you repay the loan with money that has been taxed at your marginal rate. This is very expensive money independent of how long it takes to repay. If your marginal rate is 25%, it will cost you $1250 for that $1000 loan. This man appears to be talking about taking out a 60 day loan for about $4000. The $5000 cost means the arithmetic is not good.

 

[Caroline]

What a lot you have on your plate right now, dwk...

I have no wisdom to offer, but do accept my best wishes for your wife's health and your return to work.

Your role is a tough one -- do remember to be kind to yourself as you work through all of this.

 

[Craig]

I may have lost it somewhere ... how many pieces of real estate do you own, and what equity do you have in them?

Put home equity credit lines on everything now, if at all possible. They won't know you are being restructured out of a job. We have used credit lines like cash emergency funds, and long ago, avoided losing our home this way.

Also, what is the interest rate on your home loan? For myself, I would not use severance pay in your situation to pay off a home loan. Is there a match on your pension / 401K? If so, consider investing as much of that severance pay as possible into any qualified plan, especially one that has a match.

You'll get through this ... you have accomplished much, and you have more flexibility than you may first realize.

 

[Martha]

What tough breaks! Years ago I used to work on social security appeals and I find it unconscionable that so many people are denied benefits on application and have to appeal to get benefits. Thirty years later the only thing that seems to have changed is that the waiting periods have increased.

It sounds like you should hear on the new job quickly. If you get it, then you are in a better position to use the severence to pay down your mortgage. Otherwise, it looks like you will need it for living expenses. It also sounds like you will have a decision on your house soon as well. So, if both the job and the house sale goes well it looks like you are out of the woods without having to loosen up more cash. For the short term, the line of credit at a credit union or your bank seems to make sense.

 

[Kitty]

Hang in there you know in your heart what you have to do, some of the advice here is very good. Don't rush into things pace yourself. This will all work out, maybe not the way you invisioned, but it will work out, because you will do the right thing at the right time and be ready for the oppurtunity when it comes.

I know it seems bleak right now, one day all this will be in the past. I truly believe this.

Kitty

 

[calmloki]

Not something for everyone, but perhaps you could take advantage of some 0% credit card offers before your job goes away? Might be a good time to maximixe your available credit on cards before that avenue dries up. Get a 0% card with balance transfer checks, stick a LARGE chunk of the available credit in a 5% MM, pay the 3% balance transfer fee, make the minimum payments each month - maybe that would get you a year of breathing room? Best wishes..

 

[WRBT]

I second Charles' advice... get home equity lines right now while you can still write an employer and salary on the form.

 

[WRBT]

and.... good luck with everything

 

[SteveR]

DWK,

I feel your pain. DW is also waiting for her SS disability to be approved. She lost her job in December and is on LTD until SS kicks in. She is 5 years from retirement so is losing cash flow each month. SS is a hard row to hoe for most folks. The few that take advantage of the system screw it up for those truly disabled. Both my SIL on my family side and another SIL on my DW's family side have had breast cancer. They both are alive today and one has been cancer free for over ten years.

I don't have a bunch of helpful financial advice. We are selling off our vacation cabin to lower our expenses. We have been lucky that we have not had to dig too deep in our emergency fund but I am also doing my boss's job plus mine plus one of my employees and have been for 2 months. There is not much left at the end of the month after Dr. bills and pain meds. Insurance helps but is not enough.

Keep the faith. You will get through this and will find a way to make it all work out. The most important thing is to take care of your lady. The financial stuff is secondary to that. Cut back on the non-essentials and pay only what you must. I wish you the best of luck with the interview. Being in Pharma. myself I know the issues you face. My thoughts are with you.

 

[jazz4cash]

Maybe I wasn't sufficiently clear. If you borrow money from a tax deferred account, you repay the loan with money that has been taxed at your marginal rate. This is very expensive money independent of how long it takes to repay. If your marginal rate is 25%, it will cost you $1250 for that $1000 loan. This man appears to be talking about taking out a 60 day loan for about $4000. The $5000 cost means the arithmetic is not good.

No.......I was talking about a rollover.....not a "loan". I guess you could call it a 60 day "loan", but rollovers have different requirements than loans. In any event there are several of us that do not agree with the double taxation concern.......bottom line it just depends on how big the emergency is. My thought was to take the money from the 401k and he has 60 days to complete an IRA rollover. That might allow sufficient time for proceeds from sale of property to be used to fund IRA and complete the rollover. If you do not complete the rollover, the penalty is 10% (much better that 25%)

 

[rogerc1944]

I'll try a third time. Your 401k/457/403b is all pretax money. If you take out a loan, you have to repay the loan with after tax money. You cannot replace it with pretax money. In other words, you pay income tax at whatever your marginal rate may be. Ok, now when you take money out during your retirement, then the money is taxable again. You don't get a break because you paid back a loan with after tax money. This is double taxation (I suppose you could argue that you would have had to pay taxes at least once).

Your alternative is to take the money by doing a rollover. If you do a rollover from institution to institution, there is no 20% withholding. If you take the money directly there is. If you put the money all back with 60 days, you will be able to include the amount withheld (it will come out even with your tax return). If you don't get the money back in within the 60 days, you will get a 10% penalty plus you will be taxed at your marginal rate because you took a distribution. Depending on which state you live in, there may also be a state tax (marginal rate) and a penalty (in CA it's 3%).

I have a credit union and have a personal line of credit. I can take money out whenever I want and there are no special fees. I also have a credit card that allows me to take a cash advance @7.9%/year. For a small short term loan, why go to all the trouble to get a 60 day loan for a few thousand bucks?

 

[jazz4cash]

Ok roger....lets agree to disagree. I don't think I ever suggested a 401k loan, but the double taxation issue is better suited for another thread. I am not in a position to know what is best for OP......just putting options on the tabe to be sorted through. I presumed OP would not need advice to "get a bank loan" or "use home equity line" as these seem obvious and may not be available if his employment has ended. It has been stated that rollovers from an employer plan do not require witholding, but I have not verified that statement. I do recall that multiple rollovers are permitted also, so one could possibly initiate a second rollover to pay back the 1st and so on until the urgent need is satified by sale of property or new employment. I agree these may be desperate measures, especially for someone with serious concerns at stake, but I sincerely wish OP will find an easy resolution and have a positive outcome.

This does underscore the value of have a line of credit in reserve in advance of such a situation

 

[Craig]

dwk, one other point.

Assume, for now, that you'll get a mortgage to buy that condo. The builder may assist with loan costs, and you can pay it off later. There is a time when credit is good and necessary ... I would encourage you to not be quite so focused on getting rid of debt to the point you have little flexibility.

Having available, but untapped credit can be a very good thing. And occasionally tapping credit is OK, from my perspective.

 

[lets-retire]

What tough breaks! Years ago I used to work on social security appeals and I find it unconscionable that so many people are denied benefits on application and have to appeal to get benefits. Thirty years later the only thing that seems to have changed is that the waiting periods have increased.

I agree. The Social Security website states in layman's terms the person must no be able to work they did and the SSA must think they cannot adjust to other work. I think that is a load of crap. I can't see a CEO of a major company (example only) becoming disabled and and because they can stand up and say hi have their disability claim denied, because they can be a door greeter someplace. I think it should be similar to unemployment, where the person is not required to go below a certain level from their previous employment. To me the layman's definition is how they interpret the law. Reading the law it seems the interpretation is a very strict interpretation.

 

[Caroline]

I can't see a CEO of a major company (example only) becoming disabled and and because they can stand up and say hi have their disability claim denied, because they can be a door greeter someplace.

Can't say I disagree, but I would like to point out that there are a lot of rickety old people out working as door greeters because they need the money.

I know this wasn't the main point of your comment, but I'd just like to say that IMHO that kind of work is either beneath everybody, or beneath nobody.

Besides, have you seen CEO salaries? Anyone who's helmed a major company for about 15 seconds walks away a billioinaire! ;-D

 

[spideyrdpd]

Does the double taxation really matter in this case ?
You would have to call the people that handle your 401k and see what your company rules are. I am sure there are federal rules but many of the rules surrounding loans are decided by the company. I have a loan from my old job that they debit my checking account once a month to pay back. You only get taxed twice on the interest you pay back on the loan. You would of course have to get this done before leaving the company.

If you look at doing a credit card deal make sure you get out yer magnifying glass and study the fine print. They are %R%^% and ^%^%# !!
Rob