Don’t Let a Lost Job Turn into Lost Financial Opportunities

Person using calculator and looking at paperwork

If you’ve recently been “involuntarily separated” from your job (or perhaps you left voluntarily), you are not alone. In the last five months of 2017, an average of 1.7 million U.S. workers per month found themselves in a similar situation.1

In the midst of your soul searching about the next step(s) in your career and the layoff’s impact on your future and your family’s, you’re going to have to make several important – and in many cases irrevocable – financial decisions rather quickly.

These critical, one-time decisions do not allow for do-overs. Ill-informed choices could have an undesirable impact on your financial situation, so now is the time to seek qualified advice. A good financial advisor will help you make appropriate choices based on your current and future needs, goals, and objectives.

In the meantime, the following are some important issues to take under advisement.

Open your mail and email
You will begin receiving a lot of important information in the coming days and weeks; and much is time sensitive. Stay on top of things, especially if you are taking the opportunity to get away with family.

Keep yourself liquid
You may be tempted to take that severance check and pay down some debt but you may want to reconsider. Without a regular income, you are in a temporary period of increased financial risk and cash is king. Consider that during the 2007-2008 recession, many banks closed lines of credit without warning, leaving customers without a safety net. Your financial advisor can review your portfolio and suggest options to give you more liquidity and perhaps move other assets into more conservative positions.

Continue insurance policies
The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires your former employer to offer qualified beneficiaries identical health insurance coverage for 18 to 36 months. You will be required to cover the entire cost of your premium – i.e., the portion your employer previously paid in addition to your regular contribution; but for many families, COBRA is a lifesaver.

You can also usually continue ancillary benefits such as life and disability insurance. If you have health or other issues that make you uninsurable, it may be in your best interest to continue these policies.

Develop a plan
Your immediate priorities may be covering the bills or paying for an impending vacation, a child’s wedding, or other near-term event. But how will this layoff affect your future plans? It’s time to think long-term and create a plan.

  • If you were already contemplating retirement in the near future, can you accelerate your retirement plans?
  • If you are close to or considering retirement, your social security claiming strategy may change with this layoff. If you received a sizable severance and/or are eligible for unemployment, you may be better served delaying the start of your benefits.
  • If you’re going back into the job market, what is the probability you can get another job in your field with a similar salary? If it’s been a while since you looked for a new job, do some research to properly set, or reset, your expectations.
  • If you need to bridge the gap for a few years to reach your long-term goals, what does that look like? Can you afford to accept a position with a lesser salary?

Re-evaluate your tax situation
Be aware of taxable income associated with any stock grants and options, severance, and/or deferred compensation you may receive so there are no surprises and penalties come April 15th.

For example, if you find a new job in the same year you received a lump-sum severance and/or deferred compensation, your tax situation can dramatically change. Consider making a larger contribution to your 401(k) to reduce your taxable income and/or pay quarterly estimated taxes.

Don’t rush decisions on your 401(k)
This is perhaps the most important subject to discuss with a financial professional. Your advisor will help you identify if and when it makes sense to:

  • Sell company stock in your 401(k). You may be eligible for a potentially significant tax savings if you own company stock in your 401k. To capitalize on this opportunity, you should enlist the help of a financial advisor experienced in these types of transactions; otherwise you may lose the tax advantage.
  • Roll your 401(k) over to an IRA. If you are age 55 or older and have separated from your employer, you can pull funds from your 401(k) without penalty; although you will have to pay taxes on the money. However, if you roll it over into an IRA, the IRS Rule of 55 will not apply. You will have to wait to age 59 ½ to access your IRA without penalty with a few very specific exceptions.
  • Repay your 401(k) loan. The newly passed Tax Cuts and Jobs Act grants employees more time to repay a 401(k) loan before it is deemed a distribution and becomes taxable income.
  • Roll your post-tax dollars into a Roth IRA. Although you can take a cash disbursement of post-tax dollars you contributed to your plan, the advantage of rolling those proceeds into a Roth IRA is that all future growth on those contributions will be tax free versus tax deferred if left in the plan.

Get advice from someone you trust
You may elect to call your insurance provider or 401(k) plan administrator for guidance. Keep in mind these representatives, however helpful, do not know your particular situation or may not have your best interests in mind and may provide incomplete or even incorrect information. When decisions are irrevocable, those made on bad advice can cause you irreparable financial harm.

Change is not easy for most people and losing a job can be among the most challenging life events. On a positive note, while you may feel a lack of control, if you are aware, proactive, and wise enough to seek guidance you can make smart decisions about your near- and long-term future.

If you’re like most people, the first time you try something new you may not know all you need to know to get it done right. That’s why a trusted professional is invaluable: we’ve helped hundreds of clients with these types of career- and life-altering transitions and we can help you too.

1. Economic News Release. Bureau of Labor Statistics. Published February 6, 2018. Accessed February 16, 2018.