Author: Nick Prigitano
Being laid off is never fun. While this is a stressful time, it's important that you continue to make sound financial decisions so that you don't make matters worse. Here are 6 things that you should (or should not) do if you find yourself suddenly out of a job.
1) Don't Panic!
Some academic studies suggest that those under financial stress make poorer decisions. Unsurprisingly, being laid off is an extreme financial stressor for most people. Knowing this, it's important NOT TO PANIC! The best thing you can do is take a step back, take a deep breath and try to only work on financial matters when you're fresh and have as clear a mind as possible. Often times, this is best done in the morning when the stress of the day hasn't taken its full toll yet.
A common problem that happens to many who get laid off is they immediately try to replace the lost income, usually by tapping their retirement accounts. This is something that should be avoided whenever possible. Before withdrawing from a retirement account, you should take stock of how much you already have in cash, any other benefits coming in (discussed later), what your expenses currently are and what can possibly be cut. Having a solid budget will help determine how much of a shortfall you might have, and how long you may be able to last without needing to use other funds to supplement the difference.
Ideally, you'll be back to work before needing to use your retirement funds. Using your retirement accounts during a layoff can hurt you in more ways than one:
a) You may owe additional taxes and penalties for withdrawing from a retirement account early:
If you're not old enough (59.5 for IRA accounts), or another exception doesn't apply, you may owe an additional 10% penalty, on top of normal taxes, when pulling money from a retirement account.
As an example: If you're in the 25% tax bracket and take money from an IRA before age 59.5 you would owe 35% in taxes on any money taken out plus state taxes. If you withdraw $10,000, after taxes, you only net $6,500! Much less than what you anticipated.
b) You're taking money away from your future self:
This means that you need to save more money in the future to replenish the lost retirement savings. The closer you are to retirement the more difficult it can be to catch back up!
c) If you're laid off, there's a good chance that the economy isn't doing well, and the stock market along with it:
As advisors we are always telling our clients to not sell stocks when the market has dropped. Although past performance does not guarantee future results, the stock market has historically always recovered. That's why we advocate buying and holding your investments for the long-term and to avoid making rash decisions when the stock market gets bumpy. But you can’t do that if you’re taking money out of your retirement account.
This year has undoubtedly been an unprecedented year. Although we strongly encourage clients not to touch their retirement accounts before necessary, there may be no other remaining option. Luckily for those who do need to withdraw from their retirement accounts in 2020 there is additional relief that waives some of the standard rules.
First, for qualified distributions due to some financial hardship from the coronavirus, the 10% early withdrawal penalty is waived. You'll still owe normal taxes but won't be hit with another penalty on top of it.
Second, you can put the funds back into the retirement account over the next 3-years, which usually is not an option. Although this may not help with issue #3 above, it can alleviate some of the burden of trying to save additional money to catch-up.
2) Review Your Severance Package
Although this is not always the case, many times when someone is laid off, they will be extended a severance package with various benefits from their previous employer. When reviewing the package, be sure to look at all the benefits and pay being offered to you. This includes, but is not limited to:
How are severance payments made to you, and for how long (ex: lump sum, regular pay period, etc.)?
Do you get to keep your health insurance, and for how long?
Can you keep your employer group life insurance? Do you need this insurance? Is the insurance expensive?
What are your options with your 401k?
Do you become fully vested in your 401k, if not already?
What happens to any unvested, or vested stock options?
There may be a lot to go through with a severance package, and it's important to get the details right. There may be lurking issues that you may be unaware of if you're not being careful. Every severance package is going to be different, and it's often a good idea to enlist the help of a qualified financial advisor to help walk through and determine what benefits you may need, which you may not, and how it all works together.
3) Health Insurance
One of the biggest concerns when getting laid off is how are you going to maintain health coverage? Depending on your situation one or a few different options may be available to you:
As mentioned above, sometimes health insurance is covered for a period of time in a severance package. You may be required to pay more for coverage because your previous employer is likely no longer covering some of the costs. When reviewing this it's important to note how much the insurance will cost, and how long you have coverage for. What comes in a severance package is different than COBRA.
Depending on the size of your employer, you may or may not be eligible for COBRA. This coverage only needs to be offered when a business has 20 or more employees. If you worked for a small employer this may not be an option, unless your state has a mini-Cobra law (as Massachusetts does). You would be required to pay for the full cost of the insurance since it is no longer subsidized by your employer.
COBRA also does not last forever, but hopefully long enough where you are able to find other coverage before it runs out. If you're laid off, COBRA generally lasts for 18 months.
Usually employees can only enroll in benefits, like health insurance, during the open enrollment period which is typically once a year. However, if you're subject to a qualifying event, such as losing health insurance from a layoff, this triggers a special enrollment period. During this time if your spouse has access to health insurance, they can enroll to get coverage for them and you. The window to do this is usually short (30 days), so you need to act quickly if this is an option for you.
Individual Health Insurance:
A final option is to acquire your own individual health insurance outside of an employer. This could mean going to the public health insurance exchange, or working with a private health insurer to secure coverage. These plans are usually more expensive than an employer plan for similar coverage.
4) Review Your 401(k) Options:
Depending on the investments in your plan, and other factors, if often makes sense to rollover your 401k to an IRA. In an IRA you will have more investment options, possibly lower cost funds, and more control of your money in general. However, the rules surrounding 401(k)s and IRAs are different and should not be overlooked when making this decision.
One big factor to review when deciding to rollover or not depends on your age. For an IRA, as discussed before, if you’re under age 59.5 and you withdraw money from the account you will owe regular income taxes on it along with an additional 10% early withdrawal penalty. However, for a 401(k) if you leave your job after age 55, you can withdraw money from the plan penalty free. You will still owe taxes on money taken out, but the 10% penalty does not apply after that age.
If you suddenly find yourself out of a job, there is a possibility that you might need to use retirement account money. If you’re over age 55, but not yet 59.5, it almost always makes sense to keep your money in the old 401(k), at least temporarily, to reduce the tax impact of a withdrawal if you did need one.
There are other reasons to leave your money in your employer plan (such as if you are a Minister; have an outstanding loan; own a significant portion of employee stock in the plan; have unvested employer contributions; or if you are a federal employee with a TSP not subject to the SECURE Act until 2022, among other reasons).
5) Other Benefits
When you work for an employer, they are usually required to pay unemployment insurance. If you've worked long enough you should be eligible for unemployment benefits. If you live in New Hampshire or Massachusetts you can read our post about applying for unemployment benefits there.
As part of the CARES Act, the federal government also temporarily increased unemployment benefits by $600 a week. Although this program is scheduled to end after July, there have been talks of it being extended in the future.
Depending on your state, there may also be additional programs to individuals beyond unemployment insurance. For instance, New Hampshire has a WorkShare program where someone on unemployment can work limited hours without reducing unemployment benefits. Each state will have different programs, and because of the pandemic new programs continue to be introduced. It's a good idea to keep a look out on your state's unemployment assistance page or speak with a representative periodically to see if any new programs are created.
Now more than ever it's important to maintain a good network of contacts who may be able to help you land your next job. With unemployment skyrocketing the competition for new jobs has become much tougher. One of the best ways to break through all the noise is to be introduced to a new position through someone you know. This is usually the best way to get your foot in the door.
It's also recommended to not burn any bridges at your old company. Getting let go is tough. But it's often a difficult decision for the company to make too. Keeping a good impression at the company you're leaving may keep the doors open if they begin to hire again or someone there may be able to point you to a new opportunity.
Hopefully you've maintained your relationships when you were employed so you have contacts ready to reach out to if you’re laid off. Whether you're at risk of being laid off or not, it's suggested that you continue to maintain these business relationships. It takes some work, but it might just be the thing that lands your next opportunity if you get let go.
Getting laid off is hard, but don't make it worse by making some serious financial mistakes. Take stock of what your living expenses are now, what you might be able to cut, and what your benefits may be. Make sure to have health insurance coverage, take advantage of any public benefits, and review your severance package.
There is a lot to consider when getting let go, not to mention all the financial stress that comes with it. If you need assistance with your financial plan, please reach out to our team and we would be happy to review your situation with you.