Raul Castro may be old enough to retire, he's 76, but instead, he is gearing up to run a country. On February 24, Raul officially became president of Cuba, a job he essentially inherits from his big brother, Fidel. "Fidel is irreplaceable," said Raul in a speech. "The people will continue his work when he is no longer with us physically, though his ideas always will be here."
Whether you are leading a rebellious island nation, or just switching accounting firms, starting a new job is a good time to reevaluate how you organize your savings. According to financial planners, one of the most important reasons to save is for an emergency. (After all, you never know when the forces of revolution, or corporate downsizing, may strike.) Experts also agree that when an emergency does take place, you should not tap into your retirement savings.
“Avoid your retirement funds at all costs,” says Liz Weston, author of Easy Money: How to Simplify Your Finances and Get What You Want Out of Life. “401(k)s, IRAs, you often can’t put that money back. It’s an early withdrawal and even if you avoid the penalties, you pay taxes and you have to deal with losing all the future tax deferred earnings that money could have earned.” Weston says to add a zero to the end of the amount you would take out and that is how much you can presume you are losing in future funds. “You take out $10,000 and figure you could have had $100,000,” says Weston.
Whether or not you are hit with the 10% penalty for withdrawing the money before you reach the age of 59 and half years old, the taxes owed could seriously disrupt your savings. “The tax could be as much as 40%, and if this is only a temporary thing where you are out of work for a short time, that is a lot of money,” says David Carpenter of Carpenter Associates in Littleton, MA.
So, if an emergency strikes and you are without a rainy day fund, then what? “If you own a house tap into a home equity line of credit,” says Carpenter. “That is credit you can use all the time and it has a lower interest rate. If you need it you could buy $50,000 against the house and that essentially is your rainy day fund.” Carpenter says it is a good idea to open this line of credit before you have the emergency. Some banks do the paper work for free and some will do it for a few hundred dollars, says Weston.
Depending on what you see as a worst case scenario, you can also borrow from friends or family, says Carpenter. According to Carpenter, it is important to make the family loan official, to avoid the collateral damage to a relationship. “Circle Lending and Virgin officialize loans,” says Carpenter. “And [they] are cheaper than cashing out your IRA.” Viva the savings revolution!