Episode 64 – Money moves when your finances are tight
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today we’re looking at…
Catherine
…economic downturn, that’s the phrase.
Jenny
Yes. We’ve been getting a lot of members and people who are concerned about these really stressful economic times right now. We have Catherine in the studio with us who works in our education and outreach team. You’re out in the field all the time talking with members. And yeah, there’s just a lot of concern out there right now.
Catherine
Well, in fact, on Saturday, when I was at a social event sitting next to a state employee, she grilled me on this because she was planning to retire next year, and now she doesn’t know if she can. And it’s very upsetting for her. Yeah.
Seth
And we previously recorded an episode of Malia about DCP and your investments. And so, this is kind of a second part to that conversation. Thinking more about your personal budget and thinking about what are the actions that you might be able to take now, if you’re feeling anxious. I know, I certainly want to talk a little bit about the things that you can control and the things you can’t control and making sure you’re focusing on the areas that you have some influence over, and maybe not getting wound up about things that you can’t control.
But I know, Catherine, you mentioned before we started recording, you had some examples of talking to people who have either found out they lost their job or are going to be losing their job, or folks who might be. I think the technical term in the state is riffed, meaning that you get bumped down to a lower position because your position is being eliminated, but based on your seniority.
And we don’t necessarily want to fear monger or doom cast as we’ve learned previously, but we do want people to think about what their future could look like. And sometimes it’s not always rosy. And so, Catherine, if you want to share an example or a thought that you, you know, kind of has been swimming around in your head.
Catherine
Well, first off, if you are listening to this and you have lost your job or you’re expecting to lose it, I want to acknowledge how stressful that is. And remind you that you are a human being, not a human doing. What you do for a living is not who you are. So please take care of yourself during this time of transition by, you know, the usual exercising, eating right and staying connected.
Now social connections are particularly important when you’re job hunting. You know, a great way to hear about job openings is through friends, relatives, and associates. I’ve got two jobs that way, in my past. I’m old now, but I have gotten two good jobs that way. So where appropriate, put the word out that you are job hunting and what type of a position you seek and cultivate references and letters of recommendation from those you respect. That’s a good thing to do.
Seth
Yeah, I was talking to someone who has changed jobs recently and the uncertainty around not being in a position that’s permanent, or the uncertainty of being in a position that you’re the first in the organization. And so maybe if there is some reduction in force, you might be the first out of the organization. And that certainly adds to people’s anxiety.
And it might make them less likely to move jobs. Now you might be thinking, maybe I don’t want to take that opportunity, because I’m not sure what the certainty is of this other employment. Have you had conversations with folks kind of in, in those sorts of realms, or what people might be thinking as far as: what could I do or should I do if maybe…I haven’t lost my job, but I’m feeling a little bit uncertain or anxious about what could happen going forward.
Catherine
Well, it’s funny you mentioned about changing positions. This might not be the best time to do that. I think about a family member, a niece who was offered this phenomenal, job right before the pandemic where she would have doubled her salary and she was so tempted to leave her state job and take the job because she’s so smart, so talented. But, she’s also a single mom and the benefits and such. So, she struggled and finally decided not to. And then the pandemic happened. And if she had made that leap, she probably would have been unemployed. But because she didn’t, she wasn’t. It’s an important consideration during tough economic times.
But yeah, I’ve talked with a lot of people who are struggling with this. A friend who works at a school district. She’s a SERS member and was, as you say, riffed. And as of the beginning of next school year, she’s reassigned to a new position that’s going to pay $20,000 less than what she’s currently making. That’s stressful. And it affects or could affect where she lives or what she’s able to do. That’s a significant chunk of money. So yeah, I have some ideas on what to do.
In fact, I told her, I said, hey, did you know a couple of things? I said, if you are unemployed, that 457b that you’ve been investing in, we call it DCP here at, at the Department of Retirement Systems. But you can take money out of it. And yeah, you would pay taxes on it if it went in pretax. If it went in Roth, you would only pay taxes on the earnings if you were under 59.5. But there’s no early withdrawal penalty. And there is with your pension and there is with a 403(b). So, in other words, and I’ve said this for many years in this position that, a Deferred Comp account can be a safety net for times of unemployment.
And my friend happens to be right at that age where that age is 59.5 by the way, if you are still working for a public employer and you’re at least 59.5, you can continue working and take money out of DCP. That’s huge. If you have a $20,000 cut in pay, that’s important information to know.
Jenny
Yeah, that is really good to know. So basically you’re saying if someone is unemployed then they can still draw from their DCP because they’re still separated from service?
Catherine
Yes. If they are not currently employed, if they are not employed by a public employer, they can take out money from Deferred Comp. By the way, we have a video on DCP withdrawals in our video library on our website. It’s easy to look it up how to do that. Or you know, of course you can call to find out how to do that so you can take it out.
If you are no longer employed at any age: 25, you can take it out, no extra 10% penalty. But your pension has a 10% penalty and Plan 3. The investment portions defined contribution portion has a 10% early withdrawal penalty. If you withdraw your pension money that you contributed to plan do. Yeah, you pay taxes and you pay a 10% penalty. So it really does make sense. If you have an account that doesn’t have a 10% penalty to use that first if you need to.
Jenny
Yeah, I love that about DCP, because earlier I was kind of looking at putting a little bit of extra money aside, and I was trying to decide if I should put it into DCP or my private Roth IRA that I have through a separate company. And I was like, “well, I might as well put it into DCP, because then if I do decide to like, retire early or end up leaving the state, then I can still draw that money.” Whereas my Roth IRA, I can’t take out till I’m 65.
Seth
Yeah, I think when folks are in this sea of uncertainty, thinking about all the different levers you can pull is really beneficial. I know I’ve had some conversations with folks about, who feel like their budgets maybe getting tighter and tighter with inflation or possible job changes. I always hesitate to, you know, encourage people to not save into DCP.
But if you’re currently saving 5%, maybe it’s the right time to drop it to 3% and give yourself a little bit more cushion or flexibility in your budget. Maybe taking a pause on your DCP and sending a reminder to come back in a year and saying, you know, how is my budget? Where am I at? Understanding what those different levers are within your life?
Sometimes economic downturns or recessions give people an opportunity to re-evaluate: “what are my priorities? What are the things that, you know, maybe I’ve been doing for a while that I need to stop doing or start doing?” I know we were going to talk a little bit about emergency funds as well, and making sure that you’re prepared.
Catherine
Yeah. Honestly, and I know there’s going to be some people who might not agree with this, but it’s important to have a fully funded emergency fund. And if you are investing in the market and that’s Deferred Comp, by the way, investing in the market, stop it and put your money in your emergency fund in that’s you know, I’m not a financial advisor. I have to I have to say that.
But it makes a lot of sense. And you’ll hear financial advisors say that all the time from Clark Howard to Dave Ramsey to Suze Orman, I mean, on and on and on. You need a fully funded emergency fund. Some financial advisors say you need 3 to 6 months of your barebone expenses, accessible, not in the stock market, but in an account that you can access quickly if an emergency happens.
There are some — since the pandemic — financial advisors who, you know, say, “hey, how about eight months to 12 months?” Now, don’t be overwhelmed when I say that, because that’s a boatload of money and it can take a long, long time to earn. But honestly, I’ve stopped my DCP for exactly that reason to bump up my emergency fund.
For two reasons: I dipped into it a little bit for something that was critical, and then I got used to having just… I had like six months of expenses in an emergency fund, and I haven’t had any emergencies in a long time where I needed it. And then I dipped into it to, to use for something critical, and I got comfortable with it being a little lower.
And I decided that’s foolish. So, I stopped my Deferred Comp contributions, which I love about DCP. You can just go into your page and put a zero where the dollar amount is listed, or if a percentage is listed, ya put “zero” and save it, you know or a “one.” Or, you know, you can lower it but you can also stop it because the beauty is you can start it up again.
And that’s my plan is to beef up my emergency fund. So, the second reason I’m beefing up my emergency fund is that inflation has come along. And what I used to think was fine to cover six months of expenses. I’m thinking I need more to cover six months of expenses, because of the cost. And I gotta mention it, these trade wars have me wondering if soon in the future I will need more for other expenses. So that has not been determined, but I’d rather be proactive than reactive in regards to having enough money to protect myself, during an economic crunch.
Jenny
Yeah. And the other important thing to mention here is to have your emergency savings in a high yield savings account. I have my checking account through BECU, and they offer a savings program. And the interest rate is maybe like 0.5%. And that’s most banks, most of the major banks out there, your standard savings account is only going to offer you like a 0.5%. That’s nothing in interest. But I keep my emergency fund with another bank that offers a high yield savings account. And right now, it’s like 4.6%.
Catherine
That’s good. Yeah. There are online, institutions that do offer very good [rates]. I’m actually with my credit union. They offer, a higher yield – It’s not as high as yours. I have been shopping for others. And the majority of my emergency fund is there. I have sub accounts in my regular checking account, and one sub account is named emergency fund, because that’s where I’m putting it in my additions that I’m adding, I do have that high yield savings, but I also have that sub account so that I can see that I’m, being true to myself and my plans. And it’s very motivating when every month I’m adding a little bit more every actually every pay period, I’m adding a little bit more so I can see me realizing my goal.
Seth
Something you said I really appreciated. I can’t remember if we talked about this on a previous podcast, but I heard a term, when you’re talking about emergency funds, you said looking at your bare bones budget and thinking about what are my must have expenses?
I heard another financial person, maybe it’s a book I read. She called it her noodle budget. Like the bare bones. Like, if I were just to survive, what would I need to survive? And I think that can be helpful to think about as well. Because when you say six months “oh that could be a really big number. But if I’m going out to eat less or I’m not taking a vacation, maybe I can pair that down a little bit to a number that feels a little safer or a little more manageable or reachable or attainable.”
I think that is helpful thinking and then thinking about how that would play out over time if I lost my job or if my spouse lost her job, how would we rearrange our expenses? And I think, kind of playing out different scenarios, as you said, you know: When would I tap into my DCP? Or, when would I maybe think about starting to collect out of a retirement account to collect Social Security? If I’m, you know, retirement eligible, maybe I’m going to go back to work. Maybe I’m not going to go back to work. Those are all questions that a person who’s older might be thinking about.
And a person who’s younger… you know, I had a situation where I was transitioning jobs right when the Great Recession started, and my first thought was, am I going to go back and live with my parents? I didn’t at the time. My wife and I were like: but that could be a possibility of where we’re at. We’re both not working at the time. What are the different things we can play out? At the time I was fortunate to get a job, you know, a month or two down the road, but we had a little bit of a cushion in the emergency fund and gave us some flexibility.
But thinking about what are the different scenarios that can play out can help you kind of think of like, well, this is a maybe not a scenario I would choose, but it’s not the worst-case scenario. It’s not this scary, hopefully [not] as scary as maybe you were spinning it up to be in your head.
Catherine
Well, here’s another idea. When you are considering this scenario of either a drop in income or loss of your major source of income is to have other sources of income. My housemate, was working full time, didn’t like her job. She got a new job, she started working there, and then they said, “oh, we’re not guaranteeing 40 hours.” It’s like, what? So, she left that and she’s looking for another job right now, but she’s still paying her monthly rent because she has a side gig. She has a side hustle, she has a little job that she has been doing part time in addition to her full time, work. And it’s bringing in, income and it’s taking the pressure off.
I rent two rooms in my home. And so that is my passive income stream, because it covers most of my mortgage. So that’s something to consider certainly if you’re unemployed, if you are anticipating it. I mentioned my friend who works at a school district. She used to paint and sell her paintings. So, consider the possibility of a side hustle during this time.
Seth
Also a great way to build up your emergency fund. You know, if I have a few things in my closet, maybe I’m going to go look and see. Do I still need those? Can I sell them? Can I put them on Craigslist or make an ad? You know, build up that emergency fund a little bit and make it feel like I’ve got a little more cushion in that budget going forward and doing that proactively.
Thinking about what those things would be if it’s a side job or if it’s selling some things, if it’s making kombucha. People were trying to convince me to sell my kombucha at one point, like those sorts of things could be helpful when times get a little bit tighter.
Catherine
Also, we haven’t mentioned cutting your expenses, certainly if you’re unemployed, but also if you are thinking you might be in the future or your position is subject to be, cut the expenses now. Try living on less now and give it a you know, a run to see: “okay, is this realistic or is this driving me crazy and making me depressed?”
You know, and that will inform you. It’s a reality check on how much money you really need and what you can live without. And if you are working and you’re pretty confident you’re going to be staying in your position, congratulations. That’s a good feeling. But you still need a fully funded emergency account. And so please consider adopting some of this behavior, because these are uncertain times with the economy.
And also here’s another tip. If you’re expecting that income to keep coming in: pay off some debt, pay off some non-investment debt, like your credit cards like that student loan. I mean student loans, yeah, it’s an investment in some regards, but it can be, a chain around your neck. There’s no bankruptcy with student loans, so keep paying the bills. Pay more if you are able to. If you’ve got a job that is secure and you’re expecting to keep making more, fund that emergency fund and pay off some bills.
Jenny
And increase your DCP.
Catherine
Oh, yeah. That’s the beauty of DCP. Is that, yeah, it’s there for you when you need it. And yeah, I’m a big fan of DCP for sure. And by the way, if you are 49 years old or younger, you can contribute up to $23,500 in DCP in calendar year 2025. If you are 50 or older, the maximum goes up to $31,000 and like there’s a catch up provision also for those who are within three calendar years of their declared retirement year. And you can talk with a retirement specialist to find out more about that.
Jenny
Yeah for sure. I love that because again, comparing DCP to like my Roth IRA, I can put way more money in per year to my DCP account than I can with my IRA.
Catherine
Well, and just as a reminder, with DCP you can invest pretax. Or you can invest Roth or you could do both if you want to. I have been doing both but like I said before, I’ve stopped it, just to get that emergency fund boosted. And then I’m going to go back and save more.
Jenny
That sounds great. So yes, obviously there is a lot of concern and stress. Are there any kind of silver linings that we can find in the midst of this economic stress?
Catherine
Yes, I think so. And I’m talking as someone who has a degree in Spanish, not IT, and has experienced layoffs and unemployment a few times in my career. I’m 66 now, so I can look back on it and see well what happened. Well, I developed other skills and abilities. It was very stressful. These were stressful times. I did not have someone backup family members who could help me, things like that.
But I developed other abilities and I tried things that I may not have tried in the past. And that can stretch you and expand your opportunities for the future. So I would encourage you to do that. Even, at one point I moved out of state. I became a Spanish teacher, actually, and I moved to do that because I needed a job and I couldn’t find one.
And so, I used my degree. And because I did that when I returned to my home state of Washington, I qualified for this job. When I applied, they were looking for someone with education experience, which I had just, you know, had marketing and sales experience in my background. But then I also had education. So, there are opportunities to be had in this time, even though it doesn’t feel like it.
Jenny
Yeah. So, maybe sometimes pivoting can open some of those new doors…
Catherine
…and you learn about abilities that you never knew you had. That’s a good feeling.
Jenny
Yeah. That’s true. We kind of addressed this already. But how do your mindset, or habits change during a financial crisis?
Catherine
Well, if you allow depression or fear to control you, you can sit down in front of the TV all day. I don’t do that. Yeah, yeah. I mean, force yourself out, force yourself to be with people, force yourself on a schedule of applying for jobs and I made it a habit to treat job hunting as my job. I was filling out applications, but I was also out meeting people and making connections because people know about resources.
Jenny
Yeah, yeah. What do they say? Like a third of the jobs out there never even get posted online. It reminds me of a tip that my friend had shared where, if you’re applying for jobs and if you’re doing this as your full-time job, it can be very mentally exhausting. And what she had suggested was: go volunteer once a week.
Pick an organization that you feel passionate about and go volunteer. And then that also gives you something to go do on a Tuesday that you’re stepping away from the job hunting process. So it’s not like I know when I was unemployed, it felt like this giant cloud hanging over my head. It was like I had to spend every minute of every day applying for jobs, and I love that idea of just saying, like, hey, I’m going to take this time for myself, but also to help out my community. It builds those community connections.
Catherine
It keeps things balanced and giving and putting other people first can always, always helps with that. Yeah.
Jenny
So, and then finally, what would you say for those folks who are maybe getting to retire in the next few years and they’re kind of looking into this economic downturn?
Catherine
Yeah. I’ve actually spoken with some folks who are worried about this. I’m hoping to retire soon.
Jenny
Yeah, you said you’re 66.
Catherine
Yes, next year I’m actually thinking of it. But it may not initially be what you were thinking or planning of, but it could still be a very strong possibility because we are still wondering what’s going to happen with the market.
And so, if you are planning on leaving and using money from your investments to supplement your retirement for a certain period, maybe you’re planning on postponing Social Security. Perhaps instead of doing that, you could look at part time employment or that side gig hustle. If you are working full time, you might want to talk to your employer about dropping your hours to part time. Or, with public employment, PERS, SERS and TRS for example, you can retire and then many employers will rehire you and you are limited as to the number of hours that you can work, but that could be another source of income in addition to your retirement benefits.
So, there are many ways to look at this. So don’t get discouraged. And remember, you’ve got this amazing level of experience that you can use. And from what I’ve seen, public employers tend to hire older people more than private industry. The age bias is out there, that’s true. But regardless of your age, if you’re mentally sharp, if you’re enthusiastic and knowledgeable about the subject and it’s obvious that you want to work, that’s intoxicating. People want to hire you.
Jenny
That’s great. And then I’ll also put in a plug for our amazing team of retirement specialists that are available. If you call our contact center, they’re happy to walk you through it. Obviously, as members, you can go on to your online account and use our benefit estimator. But you can also talk to one of our retirement specialists, and they can offer you not necessarily financial advice, but here are some options that you could do with your DCP or your pension or, you know, looking at Social Security and all of those different, different income streams.
Catherine
Well, thanks. This has been a good opportunity to talk about something that’s very important.
Jenny
Yeah. Thank you very much Catherine. I think you’re obviously a great demographic. You’re right there in the…
Catherine
…about to retire. Yes.
Jenny
Thank you so much for coming in.
Catherine
My pleasure.
[music outro]
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