One month ago, John Schreiber's South Freeport, New York, home became one of more than 300,000 in the state flooded by Superstorm Sandy. Since then, the 65-year-old retired school teacher has been hemorrhaging cash while he waits for an insurance payment he expects will be in the $50,000-$60,000 range. But his home repairs won't wait.
Many Sandy homeowners are finding themselves cash strapped in this financial no-man's land: The bills are here now, but the money from insurance settlements and the Federal Emergency Management Agency (FEMA) hasn't shown up yet and they don't know when it will arrive or how much it will cover.
So far, FEMA has approved $703 million in assistance in New York and $261 million in New Jersey. The Insurance Information Institute estimates claims could top $18 billion, excluding National Flood Insurance Program money for which there are no estimates yet.
Insurance companies have received 360,000 claims so far and say they are doing all they can to move money fast. But New York governor Andrew Cuomo set emergency rules this week to push insurers to hurry up and help homeowners such as Schreiber, who know the pain of waiting. He's been approved for a $15,000 advance payment from his insurer, but still hasn't received the check.
In the meantime, he has blown through $10,000 in savings and has been charging up his credit cards, bleeding his retirement accounts and borrowing from his girlfriend in the hope the insurance money will come in fast enough to replenish those funds.
There is an order of withdrawals that makes sense for the Sandy-afflicted who need to raise cash quickly. Here's how to pull together the money you need without inflicting more damage on yourself along the way.
THAT EMERGENCY FUND
Ideally, you already had three to six months of living expenses on hand. "But don't deplete that fund so much that you can't pay your bills over the next month," says Daniel Beckerman, a Long Branch, New Jersey, financial planner.
If you own stocks outside of retirement accounts, head there next, Beckerman advises. It's a good time to sell stocks now anyway, he says, because there could be higher capital gains tax rates next year.
If you have a sizable stock portfolio, you could take out a margin loan. Generally you can borrow against half of your holdings. "In essence it's a bridge loan," says Peter Lang, managing director of Hightower Advisors in Harrison, New York. These loans are pre-approved and automatic, so you can write a check to your contractor immediately. But this is risky. If the market takes a dive, your brokerage might issue a margin call requiring you to pay back the money lest they sell off your securities to cover the balance.
If you already have a home equity line of credit (HELOC), now is the best time to use it. You will have quick access to cash without having to go through a loan approval process. If you don't already have a HELOC, but the repairs you need are on a second home, you might be able to apply for a HELOC on your primary residence and use those funds to pay for improvements to the vacation home.
Like many Sandy homeowners, though, Schreiber didn't have these as an option because getting a HELOC on his damaged home would be an uphill struggle, considering the need for an appraisal. The next best option is to ask local banks if they have any short-term, low-interest loan programs for disaster victims. Community organizations might also offer quick loans.
Putting repairs on your credit card can be dangerous because interest rates are comparatively high, but sometimes it's necessary. You can transfer debt to a low-interest card, even getting as low as zero percent financing, but make sure you read the fine print: Those low rates typically last a year or less. And they often come with transfer charges. "Only use the credit card if the total amount you need is less than the total amount you'll get from your insurance settlement," says Ben Woolsey, director of marketing and consumer research for CreditCards.com.
HIT YOUR RETIREMENT ACCOUNT
There are good reasons why most financial advisors say your individual retirement accounts (IRAs), 401(k)s and 403(b)s should be your money pot of last resort. But that's where homeowners such as Schreiber are right now. "I feel like my savings, 403b, checking and credit card accounts have faucets on them that are stuck open," says Schreiber.
If you withdraw from an individual retirement account (IRA), you have 60 days to pay that money back without having to pay interest or penalties. If the insurance company could have a check to you by then you're safe, but what if they don't?
If you withdrew $20,000 from your IRA, you'd owe 20 percent in taxes and an additional 10 percent early withdrawal penalty, if you are younger than 59 and a half. That $20,000 would suddenly only be $14,000. And since that money doesn't come due until you file your taxes, you could find yourself with tax-bill sticker shock come April 15. Furthermore, you'd be unable to re-deposit the money to your IRA, so you'd lose the long-term retirement savings advantage.
BORROW AGAINST WORKPLACE PLAN, BUT WITH CARE
You can also borrow against a workplace retirement plan such as a 401(k) or 403(b) plan for up to five years without facing taxes or penalties, but there are strings attached. You are not allowed to add any extra funds while the loan is outstanding. And if you were to be leave your job before paying up, the balance of the loan would typically have to be paid within 60 days. If not, the amount you withdrew would be subject to income tax and early withdrawal penalties.
While early withdrawals and loans from a retirement account generally require proof of "hardship," such as needing repairs to a home, the IRSnternal recently eased rules to allow family members to withdraw funds to help a parent, child or grandchild who needs financial assistance due to Sandy-related expenses. So if your retirement account doesn't have the money you need, you could ask for a loan from a family member. That may not be easy, but it could be less painful than calling the insurance company one more time to inquire about your check.
By Cynthia Ramnarace of Reuters. The author is a Reuters contributor; the opinions expressed are her own.