Regardless of your age, position, or stage of life being laid off is an extremely stressful time. As we enter 2023 more and more companies are going through layoffs throwing your professional, personal, and financial life into disarray. In this piece, we will lay out the 5 key decision points that you need to nail to allow you to focus on your next career step while ensuring your financial house is in order.
1. Build an Accurate Expense Plan & Current Coverage
a. Once you have been notified of your layoff you need to first assess your personal expenses. List every monthly and annual expense that you have – Mortgage, Insurance, Groceries, Gas, Netflix Subscription, etc.
b. Once you have your list separate the expenses into Fixed & Variable expenses. Prioritize your expenses based on what you MUST pay such as your mortgage, car loan, insurance, etc., and what you CHOOSE to pay such as Netflix, Gym membership, etc.
c. Now, review your bank and brokerage accounts. Tally up your total cash on hand and then divide this amount by your monthly expense. This result will show you exactly how many months you can go before you run out of cash. It will help you prioritize which variable expenses you can cut to reduce your cash burn and which fixed expenses you may want to investigate ways to reduce.
2. Determine How to Manage Your Final Paycheck & Potential Severance
a. Next, look at your most recent pay stub. You will want to consider if you want to increase or reduce your Income Tax Withholdings, Retirement Plan, Health Savings Account, or Flexible Spending Account contributions prior to your last paycheck being paid. Some individuals may want to prioritize larger contributions to these accounts to ensure their retirement or personal expense accounts are fully funded while they are pursuing a new career or entering retirement.
b. The large variable for points #1 & #2 is a potential severance payment from your employer. This payout has the potential to provide a significant buffer while you are exploring your next step. We have seen these funds used to cover 6 months of expenses, pay off debt, or be re-invested for future financial goals. Considering the pros and cons of what to do with your severance payout is largely dependent on item #1 and what you believe your next steps may look like.
3. Rollover Retirement Plan
a. Thousands of employees often leave their previous Retirement Plan (401k, 403b, 457, Cash Balance Plan, etc.) with their previous employer each year. This often leads to a more complicated financial life, lower quality investment options, and the inability to better position your retirement assets for your future goal.
b. We generally recommend that individuals consider rolling their retirement accounts into an IRA or Roth IRA. This allows you to consolidate your investment accounts, invest in much higher quality, lower-cost investment options, and ensure that you are positioning your assets in the most tax-efficient manner possible for your future retirement income needs.
4. Create a Game Plan for Your Pension & Employee Stock Options
a. Many individuals have pensions or Company Stock/Options whenever they are leaving their employer. Correctly navigating the decision-making process with both items is worth thousands upon thousands of dollars.
b. If you have a pension, you should request a recent statement of benefits from your employer. You should also verify whether you have the option to take a lump sum payout of your pension. Once you have this information your next step is to consider your stage of life. Are you working for another 10+ years? Then you may be better off taking a lump sum and investing those dollars in an IRA where they can earn a higher potential return. OR, are you planning on retiring in the next 5 years? Then you would be strongly encouraged by our team to conduct a full retirement analysis. This analysis will break down your pension income and lump sum options – with clear pros/cons of how it may impact your retirement.
c. If you have Company Stock or Options, there are a wide array of potential options for you to consider. The first three things our company analyses for our clients are:
i. What is the outlook for your former employer? Is their outlook in the next 1,5, and 10 years strong, OR are there large potential roadblocks in your way?
ii. What percentage of your net worth is in Company Stock/Options? For many individuals, this percentage is exceptionally high. It is often beneficial to reduce your exposure partially or fully to your former employer's stock through diversification.
iii. What are the tax implications related to your Company Stock/Options? Depending on what type of company equity you have there are a wide array of potential tax implications and rules relating to when you need to exercise your options. Navigating this decision often crystallizes what your best decision is.
5. Verify Your Insurance Options
a. Every company handles laid-off employees' Health Insurance differently. Some companies provide partially covered premiums or some extend coverage for an extended period of time. At a minimum, your former employer is federally required to provide COBRA Coverage. https://www.cobrainsurance.com/what-is-cobra-insurance/
b. COBRA requires that group health plans sponsored by employers with 20 or more employees in the prior year offer the opportunity for a temporary extension of your health insurance coverage if you are laid off. Within 45 days you will receive a full statement of your coverage and the expected cost that you will be paying out of pocket, the national average premium for COBRA coverage is $438/MO/person. You must elect COBRA coverage within 60 days of receiving your election notice. COBRA coverage generally lasts for 18 months, but sometimes is expanded for longer periods of time.
Over our 30+ years in business, we have helped countless individuals navigate each of these decision points. Our team of CFP professionals has built a comprehensive one-page financial plan to help you ensure you are making the right decisions during this time to help you achieve all your personal and financial goals. If you would like to set up a 15-minute strategy call with our team, you can do so by using the link below.