Financial Strategies for Workers Who Lose Their Jobs
While everyone’s unemployment and financial situations are different, when one loses a job there are some helpful tips to consider in responding to the change:
Tip 1 – Don’t panic---while losing your job is surely a major life event, the emotional and financial implications can usually be overcome. You may be emotionally hurt but you must react to the situation to minimize the long-term financial burden related to being unemployed. While you may want to take a few weeks or so to sit back and appraise your situation -- in reality—you now have a new full-time job…that is to find another job. Join a job loss support group and start networking.
Tip 2 – Understand the conditions of your severance package (if you are offered one). Do you get a lump sum or salary over a fixed period and are there benefits of one option versus the other? When does your health insurance move to COBRA, what are the deadlines for signing the agreement or signing up for various benefits? Will your employer negotiate any additional benefits such as a longer severance package, or paying for outplacement or career services? Was your termination integrated into an early retirement package and what are the implications of that?
Tip 3 –Fully understand your state’s unemployment insurance program. Are you eligible for payments, for how long, what documents do you need, when can you apply, etc. are some questions that you should know the answers for. What happens to your benefits if you find part time employment or you get work as a temporary? In Massachusetts you can obtain unemployment insurance information online at http://www.mass.gov/lwd/unemployment-insur/claimants/.
Tip 4 –Build a budget. If you have not created or implemented a budget, now is the time for one. Look at all of your expenses including those that may change such as health insurance premiums, contributions to 401k plans, as well as those irregular expenses such as annual auto or home owner’s policy premiums. What are your sources of income: salary (is one spouse or partner still working?), rental income, unemployment and severance income.? If you are near retirement age can you start to receive social security or a pension? Track job search related expenses as they may be tax deductible.
Tip 5 – Immediately address your budget shortfall. Even if your budget is ok, evaluate reductions to your spending plan now to conserve cash for later. If you are applying extra payments to your mortgage each month, you should probably stop those payments to conserve cash. Can you eliminate or utilize some services less frequently such as a house keeper, transportation expenses, lawn maintenance, haircut or salon services, adult or children’s programs such as camps, tennis/golf or other hobbies? Can you eat at home more often or perform tasks yourself that you used to pay others to do? Don’t use credit cards to “tide you over.” Pay your mortgage and/or rent first.
Tip 6 – Take special care with your retirement plan benefits. You have probably saved for a number of years to build up a 401k, 403b or other retirement plans. Now is NOT the time to spend those funds. If you are under 59 ½ there is usually a 10% penalty for early withdrawals; however, there are exceptions. Not only are there penalties for early withdrawals but you will pay ordinary income tax on the distribution, so you may be forfeiting 25% to 40% of each withdrawal on taxes and penalties. Many people decide to roll over their 401k to an IRA so that they have additional investment choices. Your ability to borrow from your employer plan usually stops after your termination (see plan rules). Also, outstanding loans may be counted as a plan withdrawal unless you pay them off before you terminate employment. Again, see your plan documents.
Tip 7 – You will eventually find a job. It may be in a new field, you may make less than you were previously making or you may even find out that you are better off and happier in your new employment. Perhaps taking temporary work to enable you to experience new fields will ease the financial burden and give you a new outlook at the kinds of work available. Maybe it’s time to consider self-employment. Look back on the experience…what did you learn, what changes to your work/life balance do you want to make permanent, are there changes that you made in your budget that should be incorporated into your new lifestyle?