Make your severance last

ROAD TO RESCUE

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Dan Kadlec is co-author of The Power Years, a guide for boomers. E-mail him at boom_years@moneymail.com.

What you'te up against

Your severance may seem generous...

13 weeks:

Typical boomer package

22 weeks:

Average duration of unemployment ages 45-64

Source: Bureau of Labor Statistics.

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(Money Magazine) -- The job news in my hometown is grim. The New York suburbs have been plagued with real estate and bank layoffs. Things probably aren't much better where you live, no matter what the local industry is. Nationally, 2.6 million jobs were erased last year, and 2009 is shaping up as an encore performance.

There isn't much worse, financially speaking, than having your job yanked from under you, particularly when you're within eyesight of retirement. At least the bad news typically comes with a severance package that, for boomers anyway, often totals several months' pay. That's a decent amount of cash which, used wisely, can help you get back on your feet. But used unwisely, that payout can disappear shockingly fast. These strategies can help ensure that your severance lasts as long as you need it.

Your severance payout should go straight into your emergency fund to bolster your cash cushion, intact and available to be drawn down as needed to cover your living expenses. Being laid off, after all, is exactly the kind of emergency that fund is for. Chances are you will need every penny of that severance, and then some. Consider: The standard exit package gives one to two weeks of pay for every year of service, typically amounting to 11 to 15 weeks for employees ages 45 to 64. But the average boomer needs 22 weeks nowadays to land a new job, and one out of four is unemployed for more than six months.

Don't take any risks with your kitty. "The objective isn't to make money; it's to eliminate stress and tide you over to your next job," says Erika Safran, a planner with Financial Asset Management Corp. in New York City. She favors dividing your cash among a money-market fund or savings account for current expenses and three-, six- and 12-month CDs for the rest.

You don't need to adopt an ascetic lifestyle - being out of work is depressing enough - but reining in a few key expenses will help your cash flow. Temporarily suspend contributions to your IRA and 529 college savings plan. Cut home services such as gardening or cleaning (come on, you have time to job hunt and vacuum). Scale back your summer vacation plans and cancel your membership in the local swim club. The kids will survive; these kinds of cuts even help them feel that they're contributing.

Resist the impulse, though, to cut expenses by using a portion of your severance to pay down debt. The goal, remember, is to preserve as much of your payout as possible since you don't know when you'll start drawing a salary again. Then too, with banks pulling the plug on consumer credit of all stripes, what you pay back today may not be available to you if you need it in the future, says Robert Matheson, a financial planner in Estero, Fla.

Finding your next employer is your new job, but try to carve out time to take on a freelance project or consulting work to supplement your severance. Who knows? The part-time gig might even turn into a full-time position.

One place you shouldn't turn to for extra cash, except as a last resort: your 401(k). If you do, you'll lose a big chunk of the withdrawal to income taxes and could owe a 10% early-withdrawal penalty as well. Plus, let's face it, most people who tap their 401(k) early never replenish it. So their near-term problems upend their long-range goals. Losing your job is a big enough financial blow. You don't want to risk your retirement too.

E-mail Dan Kadlec, co-author of With Purpose: Going from Success to Significance in Work and Life, at boom_years@moneymail.com.

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