Your Wealth Matters: Surviving a Downsizing
No one plans on being laid off from their job. But downsizing at a company can occur even in times of economic growth. Losing a job is one of the most disruptive events that can occur to a household. One of the best methods for handling the disruption of a potential layoff is to have a plan already in place for what to do if you are handed the proverbial pink slip. Some of the options available to protect yourself and your finances have to be chosen or acted on within a specific period of time of losing your job. Having a financial plan eliminates a lot of that guesswork. That saves you time, which is arguably your most valuable asset.
The following are some strategies that should be a part of any comprehensive financial plan that also address the stress and pressures that come with losing one's job:
Replace Potential Panic with a Plan:
Losing a job is very stressful. When under high levels of stress, people make impulsive, snap decisions often without thinking through the possible consequences and just hope it all works out. A good friend and colleague of mine once told me that, "Hope is the plan of a desperate person!" The loss of a job can make someone very desperate.
Avoid the desperation trap by working with a financial professional to create a plan for you and your household. If you lose your job, you and your financial professional can go to the plan and start implementing the necessary steps to protect and preserve your financial well-being.
Go Back to the Budget:
When your household income is reduced or completely eliminated due to a layoff, it's time to cut the fluff. Knowing your household budget makes it very easy to separate monthly expenses into "wants" and "needs." It almost always amazes people when I show them what their money goes to pay for on a monthly basis. Because a lot of what people think they need, is really just something they want. When your income goes down, or disappears altogether, the "wants" need to be prioritized and eliminated until you have your budget balanced so that your expenses equal - or are less than - your income. Any major purchases you had planned need to be scrapped immediately. A good financial professional will help you develop a budget and bring in the necessary professional partners to help you put that budget in place.
Many financial professionals recommend a household have 3-9 months of cash on hand to cover monthly expenses. The reality is most families have nowhere near that amount of cash in the bank. One option would be to determine how much you would need to meet the "needs" in your monthly budget. If paring back your budget during a temporary period of unemployment is already part of your plan, the amount you should have to put back in your emergency fund will be a significantly smaller number and a much more manageable saving goal for you to reach. Again, one of the most damaging effects of a layoff is stress. Knowing you have your needs covered, at least for a period of time, will take a lot of that stress off your shoulders and make it easier to think clearly.
Retirement Accounts (401k, IRA, etc.):
If you've been in the workforce for a while and were diligent about saving for retirement in an IRA, 401(k) or some other type of qualified retirement account, you probably have built a sizeable nest egg. DO NOT TOUCH IT! It is very tempting to think about tapping into your retirement funds during the period while you are trying to find work, but doing so doesn't come without some possibly severe consequences.
First, all of the money in a qualified account has never been taxed, so any withdrawals you take now will be subject to federal and state income taxes. Moreover, if you are under 59 and a half, you are also going to have to pay an additional 10-percent penalty for making an early withdrawal. This is reduced to age 55 if you are laid off from your job, but this does not help younger workers. There are only a handful of exceptions to this penalty and you will have to visit with your financial professional to determine if any of those exceptions apply to your specific situation.
Second, never forget what the money in your retirement account is truly for: To give you an income when you don't want to work anymore, or can't work anymore due to health or personal reasons. Taking money from your IRA or 401(k) now is stealing from your retirement later on.
After reviewing all your options with your financial professional, you may come to the conclusion that tapping into your retirement is the only viable option. Consider a loan instead of an outright withdrawal from your 401(k) first, if your plan permits this strategy.
Health Insurance and Employee Benefits:
Increases in healthcare costs continue to outpace inflation every single year. If you have a dual-income household, have the other income earner talk with their benefits contact about picking up everyone in the household on their plan. If you have a single income household, or your spouse has no access to health benefits, talk with your soon-to-be-former employer's benefits department. You can maintain your current health benefits through COBRA for up to 18 months, but that can be very expensive. The Affordable Care Act may make it possible for you to purchase more affordable healthcare insurance. If your family is healthy, it may be best to get a very simple plan that only covers catastrophic care for a much lower monthly premium.
If you have employee benefits like stock options, deferred comp. or employee stock purchase plans, you will need to know what you can take with you and what you will lose. Work with your financial professional to determine the best way to retain as many of those benefits as possible.
Make a list of everyone that you owe money and be proactive in calling them. Many creditors are willing to work with people when they lose their jobs. The reality is they would rather get a reduced payment for a temporary period of time than go to the hassle of sending your account to their company's collections department. Only make minimum payments on credit cards. See if your bank is willing to allow you to make interest-only payments until you find work. If you have student loan debt, you may be eligible for a reduction or deferment of payments for a period of time. The goal is to continue paying your debts as much as possible so your credit score is not impacted by the loss of your job.
Many companies will offer severance packages to employees who have been laid off. Sometimes these are negotiated on the front end when someone is hired. Even if you didn't have the opportunity to do this when you were hired, you should at least try to negotiate a better package at the time your employment is terminated.
Part-Time or Temporary Work:
You will be able to stretch your emergency savings further if you have some sort of income coming in while you are looking for a permanent replacement to your old job. Having some form of work can also help with your overall mood in addition to helping pay the bills. This will take some stress off of you while you do your primary job: Finding permanent employment.
There are several government programs available to help people when they lose their jobs. We've all paid taxes to pay for these benefits... so use them if you find yourself without a job someday.
Losing one's job is nerve-wracking. You could be unemployed for only a short period of time, or it could be for longer than you expect. Considering these issues and developing a comprehensive financial plan to address them will better prepare you for the financial shock of losing a job. Having a plan and working with a financial professional won't eliminate all the uncertainties of losing your job. But it can reduce your stress and give you clear steps and objective advice on how to get going in the right direction again. It may even keep you from taking a job that you hate but need to take because you didn't have a plan and have run out of money, which is possibly the only thing worse than losing your old job in the first place.
Arvest Wealth Management offers wealth management, trust services and insurance products. Investment products and services provided by Arvest Investments, Inc., doing business as Arvest Wealth Management, member FINRA/SIPC, an SEC registered investment adviser and a subsidiary of Arvest Bank. Insurance products are made available through Arvest Insurance, Inc., which is registered as an insurance agency. Insurance products are marketed through Arvest Insurance, Inc., but are underwritten by insurance companies. Investments and Insurance Products: Not FDIC Insured, May Lose Value and Not Guaranteed by the Bank. Trust services provided by Arvest Bank.