A layoff or buyout offer – voluntary or involuntary – is a difficult experience.
Right now, you may be overwhelmed by thoughts on how it will impact your family, career, retirement and other financial goals.
Recognize that a layoff is not a reflection of anything you did. As markets change and technology evolves, it can happen to anybody.
The most important thing is to ensure your finances are in a place to help you through a period of unemployment while still keeping you on track toward your ideal financial future.
Let’s work together through the financial steps you should tackle after a layoff so that you can start to concentrate on your next chapter – whether it is a new job or the transition to retirement.
STEP 1: Review your current financial situation
Regardless if you want to keep working or retire, the first step is to determine how financially prepared you are for a period of unemployment. It could last weeks, months or even longer. So, you want to ensure you have enough money to cover your necessary expenses. If you come up short, make changes to lower your expenses wherever possible.
WHAT TO LOOK FOR
Do you have an emergency fund?
Your emergency fund serves as a safety net to cover unexpected financial hardships, like the loss of your job. A good rule of thumb is to have 3-6 months’ worth of expenses saved.
Where can you reduce or eliminate expenses?
Since you don’t want to exhaust your savings or emergency fund too quickly, it is crucial to start reducing your spending.
Take a look at your budget. Start with your discretionary expenses (dining out, entertainment, memberships, etc.) and then move to the non-discretionary (mortgage or rent, utilities, insurance, etc.). Highlight expenses that can reduce or eliminate – at least temporarily. Can you move to a cheaper phone or cable plan? Can you cancel any unnecessary subscriptions or memberships?
And put any major purchases on hold. For example, a new car. As your lifestyle temporarily changes, so should your budget.
Will your creditors provide assistance?
Sometimes banks and credit card companies will give you a break when you suffer a financial hardship. Call your creditors to inquire about lowering your rates for a lower monthly payment or for deferring payments altogether.
Is it possible to refinance some of your debt?
One way to reduce debt payments is to refinance, if possible. If you own your home, you may qualify for a lower mortgage rate that saves you hundreds a month.
If eligible for a pension, should you take it?
If you are entitled to a pension, ask your company for the projected benefit assuming you leave now. You will likely have the choice between a lump-sum and monthly annuity payout. Remember, your decision is irreversible. So, you may want to work with a financial adviser to determine which payout option makes sense for you. Also, find out if collecting the pension will void any severance payments or benefits that you may receive.
Building an emergency fund is one of the most important financial goals anyone can have. It prepares you for when things don’t go as planned. Therefore, make replenishing your emergency fund is the first thing you do once you return to work.
STEP 2: Sign up for unemployment
Do not delay contacting your state to sign up for unemployment benefits. Again: do not delay. It can take up to eight weeks to process your application.
Unemployment lasts for 26 weeks, and the average nationwide unemployment benefit is a little under $400. It is subject to both federal and state taxes.
Therefore, unemployment is unlikely to make up entirely for your loss of income. You may want to consider some short-term income options, such as freelancing or temp work. Just keep in mind work earnings can impact your benefit.
Watch out for this mistake: your employer encourages you to resign rather than be laid off. It is better no to resign. Because if you do, you may not qualify for unemployment benefits should you need them.
Visit your state’s government website to learn how to sign up and what rules apply.
STEP 3: Update or create your financial plan
In addition to how a layoff or buyout offer affects you today, consider how it impacts your long-term finances. That means updating your financial plan, or creating one if have not.
The purpose of a financial plan is to provide guidance and specific steps to help you achieve a financial goal or navigate a particular situation, such as a layoff. It can provide what you need most during this time – certainty. And as your life changes, so should your plan.
If you don’t have a financial plan, it’s never too late to get one. You can create a financial plan with the help of a financial adviser – often free of charge. Advance Capital Management, for example, provides financial plans with no cost or obligation to become a client.
STEP 4: Carefully consider any early retirement or severance package
Taking such an offer can be a no-brainer for some workers, including those who are ready to retire or change jobs, or worry their company won’t survive.
The amount will vary among companies and employees, though it’s typical to get one to two weeks of pay for each year of employment.
However, there are additional details that are just as important as the amount. It can be a complicated and emotionally fraught decision. You may have to choose between two unappealing options: giving up a paycheck when jobs are scarce or staying in an insecure job without any guarantee of severance if layoffs continue.
Making matters worse is that you don’t have a lot of time to decide. Under federal law, employees often have only up to 45 days to consider such an agreement, plus seven days after signing in which to change their minds.
As a binding decision, you want to think about the pros and cons of each choice carefully.
REASONS TO CONSIDER ACCEPTING
You are financially and mentally ready to retire
You want to change jobs
The amount will last until retirement or a new job
You are worried about the survival of your company
The offer includes generous exceptions (ex., outplacement services, accelerated stock vesting options, early retirement benefits)
REASONS TO CONSIDER DECLINING
The offer amount is too low
You haven’t reached enough years of service for certain benefits (ex., pension)
You will be unable to retain health insurance
Early retirement or a severance package is one of many financial decisions a financial adviser can help you navigate. The right answer is rarely obvious. It is a decision you shouldn’t make without considering your whole financial picture. You may be in a better position to retire than you realize.
STEP 5: Maintain health coverage
If you receive health insurance through your employer, one of the most important things to do is to find out when that coverage ends.
That’s because medical bills are the biggest cause of bankruptcy in the United States. Even if you are healthy, it is not worth the risk to go uncovered. Although you are unemployed, you may still have options available to you for health insurance.
HEALTH CARE COVERAGE OPTIONS:
Cobra: Under a federal law known as Cobra, companies with 20 or more employees generally must allow departing workers to stay enrolled in the health plan, typically for up to 18 months. But while many firms subsidize workers’ premiums, they can require former employees to pay up to the entire premium, plus 2%.
If you are married, join the health plan provided by your spouse’s employer
Shop for coverage on the Affordable Care Act Exchange
When evaluating health insurance, look at more than just the premium. Examine the quality of coverage, deductibles, co-pays and out-of-pocket expenses. If you have different choices, make sure to pick a plan that gives you the coverage you need first and then compare on price.
STEP 6: Leave your 401(k) and other retirement accounts untouched – if you can
During a financial hardship, such as a layoff, it can be tempting to use the pool of money that you have built up in your retirement accounts. If you absolutely need the money, then you need the money. There is no way around it.
But if you can get by on other sources of income, you will be doing yourself a huge favor. That’s because there are consequences to withdrawing funds from your retirement accounts.
The first and immediate consequence is taxes. You will owe federal and state income taxes on withdrawals from a traditional IRA or 401(k), plus a likely 10% early tax penalty if you are under 59½—or 55 in the case of many 401(k) plans.
Then there is the long-term consequence of having less money in your accounts growing for your retirement. Over time, this could mean missing out on a significant amount of investment earnings.
Imagine someone who is age 30 and withdraws $14,000 from their 401(k). Let’s assume that person is in the 25% tax bracket and lives in a state with a 3.75% income tax rate. As someone under age 59 ½, the early tax penalty applies. Here is how much is actually received:
$14,000 gross distribution
-$3,500 federal income taxes (25% rate)
-$1,400 early withdrawal penalty (10%)
-$525 state income taxes (3.75%)
=$8,575 net distribution after taxes and fees
But what are the long-term costs?
The $14,000 is no longer invested. Let’s say this person retires at age 62. Over 30+ years, assuming an 8% annual return, that money would have grown to $152,147. That is a potential loss of 10 times the amount over time!
If you’re furloughed, which means you are technically still an employee, you may be able to take out a loan from your account. However, you have to remember that money will no longer be invested and it needs to be paid back. If you leave the company, then any outstanding loan counts as a withdrawal and is subject to taxes.
When you leave a company, you typically have the option to keep your retirement account savings there, withdraw the full balance or transfer it to an IRA. Generally, the best option is to roll over your 401(k) to an IRA. A 401(k) rollover can provide many advantages, including greater investment choices, greater withdrawal flexibility, more withholding options, and professional management by a financial adviser. When done properly, no taxes apply.
STEP 7: Devise a Social Security strategy
If you are an older worker, the impact of a layoff on your Social Security benefit becomes a concern.
Social Security is calculated by taking an average of the 35 highest years in your earnings history, adjusted for wage inflation before age 60. So, if the last few years are zeros, it could potentially lower your benefit.
Therefore, it is important to figure out what age to file for Social Security is most appropriate for you.
SOCIAL SECURITY AGES
Earliest age to file is 62: Filing early permanently reduces your benefit. You will receive around 70% of your full benefit. This may make sense for those who immediately need the money, those with health issues, or those who retire and don’t want to fully rely on funds from their retirement accounts.
Full retirement age (FRA): This is the age at which you receive your full benefit. It is age 66 or 67, depending on your birthdate.
Age 70: Every year you delay starting Social Security from age 62 up to age 70 entitles you to a higher benefit of up to 8% per year. A benefit at age 70 will be 76-77% higher than the payout if you start at age 62. If a layoff impacts your Social Security benefit, you may want to consider delaying, if you can, to build it back up.
But the size of your benefit is only one part of the equation. Other factors, including when you start receiving your benefit, how many years you anticipate collecting it, how you plan to use it and your marital status, are all equally important.
Also, keep in mind Social Security is taxable, so you need to be mindful of how other income sources – retirement account withdrawals, pension, work, etc. – can impact your benefit. Up to 85% of your benefit is taxable.
If you file for Social Security before your full retirement age and choose to earn some extra income working, be careful. Earnings can temporarily lower your benefit.
If you receive work earnings and Social Security income before the year you reach full retirement age, $1 is withheld for every $2 you earn above $18,960 (2021). In the year you reach FRA, $1 is withheld for every $3 earned above $50,520 (2021) until the month you reach FRA. Once you reach FRA or older, you may keep all your benefits, no matter how much you earn.
STEP 8: Seek new opportunities and self-care
Investing in yourself often pays the best dividends. There are a variety of things you can do now to improve your chances of finding new opportunities or reinventing your career.
WAYS TO FIND NEW OPPORTUNITIES
Update and polish your resume
Network with colleagues and on social media channels (LinkedIn, Facebook, etc.)
Contact recruiters in your area
Get creative: start a blog or video series that helps promote your skills in an area of expertise
Research opportunities in new industries and things you are passionate about
MAKE TIME FOR SELF-CARE
Remember, a period of unemployment can take a toll on your overall well-being more than you expect. And your physical and mental health impacts every aspect of your life, including your money. So, if you are not feeling your best, everything else in your life may suffer, too.
In this challenging time, be sure to still make time for yourself. Spending every hour sending out resumes won’t help. Don’t feel guilty about still living life and having fun. Most importantly, lean on your friends and family for support.
A layoff is a challenging situation where you can use all the help you can get. Whether it is a former boss, co-worker, friend, family member or financial adviser, ask people for help. Take it from Charlie Brown:
“Asking for help isn’t weak, it is a great example of how to take care of yourself.”
STEP 9: Get professional financial help
Leaving the workforce can be an emotional and confusing time. That is what financial advisers are for. A financial adviser is prepared to help you not only plan for the future, but also guide you through difficult financial and personal hardships.
THINGS A FINANCIAL ADVISER CAN DO FOR YOU:
Develop a Financial Plan
Plan to Maximize Benefits
Help determine Monthly vs. Lump Sum
Early Retirement & Social Security Strategies
Walk You Through the Process/Paperwork of Retiring
Review 401(k) & Recommend Appropriate Investments
Act as a Resource for Financial Concerns
Your financial life is too important to let it go unattended. Consider working with a financial adviser who can help in all phases of your financial life and guide you toward your financial goals.