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Pay cut and may lose job

Question: A: I am currently employed (Not sure how long this will last?) just took a 30% pay cut and there is a good chance that I will either be laid off or the company will close it's doors within the next two months. I have a good amount of money in my 401K and a separate traditional IRA from a previous job.

My concerns are that I don't have an adequate emergency savings to draw from while I search for work and I will need to pay bills for quite some time as the current job market is awful...I may have to do some re-training/ie.. Find a new line of work.

As much as I hate the thought ...What are your recommendations in regard to an emergency draw of funds from either the 401k or the IRA to ensure my family does not find themselves out on the street? David, Livonia, MI

Answer: I'm sorry for your circumstances. That's tough and, sad to say, you have far too much company these days. The standard advice about not tapping into your retirement savings isn't so standard if you lose your job and your family comes close to finding "themselves on the street." Period.

You take care of your family first. That said, I'm hoping you are far from those dire circumstances. I would urge you to consider tapping retirement savings a last resort. It's the last financial defense in protecting your family.

I'm sure you're already doing all these things, but just in case, while you're still are earning a paycheck I'd cut back on spending, boost savings and plan ahead. This is the time to start going over your budget, and figure out where lie the savings. You also need to get a feel for income. Yes, you'll lose you job, but will there be severance? How much unemployment insurance will you get? Does you spouse work outside the home? What are the training opportunities open to you? Is there state, local or nonprofit money available to help foot the training bill or transition to a new career? I'd also talk to former colleagues, friends, tap deep into the network of people you've developed over the years. There are many steps to take preparing for the possibility of bad days ahead--and hopefully it won't come to pass.

One last thought: If after all this it turns out that you HAVE to touch retirement money, just draw what you need. That way you'll preserve as much of the retirement savings as possible while minimizing the impact of the 10% penalty and taxes on the withdrawal.

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