Survival Guide for Workers on the Edge

USA Today

Like thousands of other workers in the airline industry, William West of Rock Hill, S.C., has learned how to do more with less.

Since Sept. 11, 2001, the maintenance worker for US Airways has seen his salary plummet 34%. To support his wife and two children, West does lawn maintenance and works part time for Federal Express. The family tries to reduce expenses by using grocery coupons, ''and some things you just don't do any more,'' West says.

West considers himself lucky. His 401(k) is intact, and he's managed to stay out of debt. Other airline workers haven't been so fortunate. They've seen their financial security eroded by salary cuts, benefits reductions and layoffs. Many are shouldering big financial obligations: credit card debts, home mortgages, college tuition. Retirement is looming. In today's Managing Your Money, we suggest survival strategies for turbulent times.

Banking on your home

A home can be both a burden and a blessing. Your mortgage is probably your largest financial obligation. But if the value of your home has increased, your home could also represent a source of much-needed cash. Tips for homeowners:

• If you're worried about a pay cut or job loss, get a home equity line of credit now. It will be much harder to qualify for a loan after your salary is reduced or your job is eliminated.
• Once you've gotten a line of credit, treat it with care. If you fall behind, you could lose your home. Most lenders provide checks you can write against your home equity line, but that can lead to trouble, says Nancy Flint-Budde, a financial planner in Salem, N.Y. If you write a lot of checks to pay your bills, ''You'll lose track of how much you're building up,'' she says. Consider taking out a lump sum to help tide you over, so you're aware of exactly how much you'll need to repay, she says.
• If you're already in debt, look for ways to reduce the cost. Home interest rates are still near record lows, so swapping credit card debt for a home loan can significantly lower your monthly bills. Just make sure you follow up with a ''sacrificial burnt offering of the credit cards,'' says Mark Bass, a financial planner in Lubbock, Texas. Otherwise, you could find yourself even deeper in debt.
• Consider downsizing to a smaller home, particularly if your home has gained in value. Home prices have soared in many parts of the country, but that could change, says Mari Adam, a financial planner in Boca Raton, Fla.
  
  ''If downsizing is in your future, get that house moving'' while the market is strong, she says. Otherwise, you could be forced to sell your house in a declining market, says Adam, whose clients include many airline employees.
• If you have an adjustable-rate mortgage and plan on remaining in your home, consider refinancing to a fixed rate. Adjustable-rate mortgages typically offer below-average rates in the first few years, then adjust to market rates. In the past, many airline pilots used these mortgages because they expected their salaries to increase, enabling them to handle higher payments, Adam says. If your salary is stagnant or declining and you plan on remaining in your home for a while, locking in a fixed rate will protect you against payment shocks. Rates on fixed-rate mortgages have been declining in recent weeks. The average rate for a 30-year mortgage is 5.69% this week, mortgage investor Freddie Mac reported Thursday.

Paying for college

Putting a child through college is hard enough when you're earning a regular salary. If your paycheck is cut, college may seem out of reach.

But don't tell Junior to put away his textbooks until you've explored all your options. Call the financial aid office at your child's college or university and explain your situation, says Kalman Chany, author of Paying for College Without Going Broke. You may qualify for additional aid. Make sure you provide plenty of documentation, such as pay stubs that show the difference in your salary or a letter from your employer, he says.

If you haven't qualified for financial aid in the past, you may be eligible now, Chany says. Even though the 2004-2005 academic year has started, some state aid is still available, he says. Depending on your circumstances, you may also qualify for a federal Pell grant, which is awarded based on financial need. Unlike a loan, it doesn't have to be repaid.

Other options include:

• Loans. The Parent Loan for Undergraduate Students is a federal loan program for parents of college students. You can borrow up to the amount of your child's college expenses, regardless of your income. The interest rate, which is adjusted every July 1, is currently 4.17%, a record low. PLUS loans are available year-round. Contact your child's college financial aid office for details.
• Your Roth individual retirement account. Ordinarily, withdrawals from a Roth account before age 59 1/2 are subject to taxes on earnings and a 10% penalty. However, the 10% penalty is waived if you use the money to pay for college tuition.
• Savings Bonds. Parents who redeem Savings Bonds to pay for a child's college education may qualify for a tax break on some or all of the interest. To qualify, the bonds must be held in the parent's name, not the child's, and you must meet the government's income eligibility requirements. For more information, go to www.savingsbonds.gov.

Protecting retirement

When times are tough, it's tempting to dip into your retirement savings. But don't tap those accounts until you've exhausted all your other options, financial planners say.

Early withdrawals from a 401(k), IRA or other tax-deferred account will trigger bruising taxes and penalties, sharply reducing the money you'll have for retirement.

That nest egg has never been more important. Financial troubles at major airlines have jeopardized employee pensions.

In addition, a pay cut could reduce your Social Security payments when you retire.

In some cases, though, families have little choice. If you're up against the wall, consider these options:

• Take out a loan instead of a withdrawal. Many companies allow workers to borrow from their 401(k) plans. Payments, along with interest, are deducted from your paycheck.
  
  Be careful, though. If you're laid off or quit, you'll have to repay the loan balance within 90 days. Otherwise, it will be treated as an early withdrawal. You'll have to pay taxes on the amount outstanding, plus a 10% penalty if you're under age 59 1/2.
• Arrange a penalty-free withdrawal plan. An IRS regulation known as the ''substantially equal periodic payments rule'' allows IRA owners who are under 59 1/2 to avoid the 10% penalty, says William Howard, a financial planner in Memphis. To comply, you must agree to take a predetermined amount from your IRA each year.
  
  The IRS offers several methods to calculate your withdrawal.
  
  To avoid the penalty, you must take the withdrawals for five years or until you're 59 1/2, whichever is longer. You can't stop taking withdrawals when your financial situation improves.
  

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