To cash or not to cash a severance check

By DAVID BRINN
So, you've been working for a company for 10 years, and just got laid off. Thank goodness you have your severance pay to live on. Or do you? Pension and financial planners warn about treating severance payments like "found money" and caution that the money should be used only if there's no other alternative. "People seem to feel that every time they leave a job, they can take their severance pay and go off and buy a car and go on a world cruise and it has nothing to do with your pension money," says Norman Zysblat, a senior agent at Shaham, the country's third largest brokerage firm. But according to Zysblat, the pension money put aside each month by an employer and employee through their tlush maskoret (salary slips) also includes the money earmarked for severance. Unlike the common conception that severance pay is coming solely out of the deep-pocketed coffers of the employer, the reality is that severance pay is mostly money that's part of your pension plan earmarked for retirement. "That is one of the biggest mistakes people in Israel make, not realizing the way that pitzuim - severance pay - is built into the system for pensions and managers' insurance [bituah menahalim]," he says. In today's global economy, workers switch jobs and careers with a much greater frequency than years ago, where employees were more likely to stay at one company for 30 years. According to Zysblat, people change jobs more like every three or four years. And each time they leave one place of employment, they receive severance pay. "What I frequently encounter in dealing with pension funds and financial planning is that people are taking their severance pay, they're spending it and then they go through the next job and do the same thing," says Zysblat. "Then, they get to their mid-40s and they ask a broker to come around and analyze what they've collected over the years. And they're shocked to discover that they've only got half the money they thought they had toward their pension. By spending severance money, in essence, you're using practically half of your pension money each time by the time you eventually reach pension age." So, what should you do, when offered a fat check of severance pay when you've been laid off? Zysblat urges, just say no. "Even if the employer's accountant is saying, 'This is your severance money; it's tax free; you can take it out,' don't do it. Once you take it out, you're going to spend it, that's human nature. I've never met a client who has taken it out and says I can invest it better than the insurance companies and 10 years later comes back and says, 'Look, I've done better,'" he said. Instead, the severance money should be kept in the fund it's been in, and despite the current losses being accrued due to the financial downturn, over time, the principal will grow. And, Zysblat stresses, the money, if needed, can be withdrawn at any point in the future. Charley Waraday, who was fired from IDT, says that he wasn't consulted by his employer and received his severance pay outright in a check. "I viewed my severance as 'let's go blow it.' But I'm married. Need I say more?" says Warady, adding that he hadn't been aware that the severance money was coming out of his pension. The deliberations between "blowing it" and spending it carefully reflect the fact that many newly unemployed people don't have a nest egg to fall back on, and unemployment payments, which at the most cover 66 percent of a person's previous salary, may not get him over the hump. So there may not be a choice about using severance pay, not to take a cruise or remodel the kitchen, but to buy food. "Obviously, if you're penniless with no savings, can't find another job, have no other resources and you can't even buy hallot for Shabbat and look after your kids, then you have no choice. Here is money that's available and you have to use it," says Zysblat. "But, if you can make do on unemployment payments, try not to touch the severance pay. If after six months you're not employed, then consider taking the severance money out. You can also just take part of the money out." Zysblat also advises newly unemployed people to consider keeping their pension policy alive even between jobs. "All pension funds and insurance companies in Israel allow you to carry on making payments on just the risk elements in the policy for one to two years. You freeze any contributions to savings until you sort yourself out, and find a new place of employment," he says. "The payments are not very high, and this way, you're covered for two worse eventualities - life insurance which you don't want to give up and temporary disability insurance [ovdan kosher avoda]. This could happen in the period of time when you're not working in between jobs, and if you've given up the pension policy, you could find yourself in a very unfortunate worst-case scenario." Of course, many people will ignore any of the above advice, and take the cruise.