Managing a Job Layoff
Photo Credit: Clem Onojeghuo, Unsplash
Key Points
■ Work closely with your financial advisor to establish spending priorities and determine the best options for managing retirement assets.
■ Apply for unemployment benefits immediately. There are strict deadlines that can’t be missed.
■ If possible, don’t let health insurance lapse. Otherwise, a health crisis could seriously jeopardize your financial stability.
■ Consider deferring debt payments until your situation stabilizes. Many creditors are willing to revise or suspend payment plans temporarily while you look for work.
A layoff is a terrifying experience that leaves many people anxious. How long will I be unemployed? Do I have enough savings to endure until I find a new job? Will I be able to make my mortgage payments? With your financial advisor, you may begin to assess your circumstances, address your goals systematically, and try to weather this setback without completely reorganizing your finances.
Step 1: File For Unemployment
Applying for benefits has become much more accessible in many states now that you can apply over the phone or online. After-layoff filing deadlines are strict, so contact your local unemployment office immediately. Typical unemployment benefits are paid for 26 weeks based on your past earnings. Check with your local unemployment office for information on qualifying amounts, which vary by state. Remember that the IRS considers these benefits to be income and hence subject to taxation.
Step 2: Create A Budget
Once you have determined your monthly unemployment benefits, cut your costs. For now, try budgeting simply for necessities and reviewing your spending patterns to identify areas where you might cut back. Premium cable, out-of-town dinners, and theater tickets are discretionary expenses you may want to cut to guarantee you have enough money to cover the essentials.
Step 3: Shop For Health Insurance
If feasible, include health insurance in your budget; it should not be considered a luxury item. A medical emergency may be financially catastrophic when you don't have health insurance. Enroll in your spouse's or partner's employer-provided health insurance plan. If not, consider using the Consolidated Omnibus Budget Reconciliation Act (COBRA).
COBRA permits employees to keep their health benefits when their job ends. Generally, you are liable for 100% of your coverage during this period, so choose a high-deductible plan to keep monthly payments low.
Step 4: Contact Your Creditors
As soon as you find out that you will be laid off, notify your creditors (mortgage lender, vehicle lender, bank, etc.). It's good to warn them that you will try to make your payments, but your funds may become tight. Consider doing this while you are still a good borrower and are not at risk of skipping payments. You may lose negotiation leverage if you wait until you are in arrears. You can work out a temporary settlement to reduce or halt payments in many circumstances. You might pay the minimum amount due monthly if you have credit card debt. When you have a job, consider making greater payments.
Step 5: Manage Your Retirement Assets
You may not want to touch any assets in a retirement plan unless your financial condition is grave. Early withdrawals are considered taxable income, and you will suffer a 10% IRS tax penalty if you withdraw before the age of 59 1/2.
You can quit your 401(k) with your employer, but your investment selections will be restricted to those offered by that plan. Consult with your financial counselor or investment expert before transferring any 401(k) assets from your previous job into an individual retirement account (IRA). A direct rollover into an IRA incurs no penalties or taxes and gives you greater flexibility in allocating retirement funds.
If you roll over your payout, you must choose how to invest your funds. Mutual funds are a popular option for IRAs because they provide expert, full-time management, diversification (to help minimize the risk), and the freedom to switch from one fund to another as your needs change. Remember that all investments, including mutual funds, entail risk, including the possibility of losing the initial investment. The principal value and return of mutual funds will fluctuate with market circumstances, and shares may be worth more or less than their initial cost when redeemed. Nevertheless, diversity does not ensure a profit or protect against loss.
An IRA rollover has advantages and drawbacks based on your investment alternatives, services, fees and expenditures, withdrawal options, mandated minimum distributions, tax treatment, and specific financial circumstances and retirement goals. Please be advised that transferring retirement assets into an IRA account may increase costs since the underlying funds may be subject to sales loads, higher management fees, 12b-1 fees, and IRA account expenses such as custodial fees. Consult your financial counselor or investing expert for help assessing if a rollover to an IRA is right for you.
Step 6: Prepare to job-hunt
Some expenses may be connected with job seeking, such as transportation, resume printing, business cards, and networking activities, such as business lunches. These expenses are tax-deductible under some circumstances, so keep receipts for these outlays.
Several job-hunting sites are free, so make the most of them. Resume assistance, interview suggestions, and job leads are available through state unemployment offices, public libraries, and your former employer's human resources department. Networking is entirely free on LinkedIn and many other online job-seeking services. You can also upload your CV on these sites, allowing potential employers to review your achievements without setting up an interview. Consider a part-time job while you hunt for something more permanent. Additional money can reduce your ability to receive unemployment benefits, but it could also lead to full-time work.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
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