Chances are you or someone you know have been laid off recently. Being unemployed is difficult enough, but in a cruel twist, the longer you're out of work, the harder it can be to find a job. And, when work does finally materialize, it's often a lower-paying position. This double whammy can damage your finances for years to come.
If you've recently been laid off or worry your job may be in jeopardy, there are several steps you should take immediately to protect yourself financially:
Investigate severance benefits. Employers aren't obligated to provide severance unless it's part of an employment agreement, but it doesn't hurt to ask. Use knowledge of your company's severance policies – and what others have gotten – to negotiate a better package.
Common severance benefits include:
- Severance pay, usually based on annual wages and years of service.
- Extended health care insurance and assistance paying premiums.
- Temporary use of company resources, such as office space or equipment.
- Outplacement counseling.
Apply for unemployment. Depending on your length of employment and other factors, you may qualify for unemployment insurance payments. The waiting period is based on the date you file, not when you lose your job, so apply immediately.
Rein in expenses. Even if you've built up a considerable emergency war chest, long-term unemployment can devastate your savings. Analyze your budget carefully and track all expenses, looking for non-essentials to trim (unnecessary vehicles, eating out, cable TV, new clothes, etc.)
Manage your bills. Ordinarily, making extra mortgage, loan and credit card payments is a great financial strategy, but if you're facing unemployment, it may make sense to scale back payments to boost your available savings to pay bills. Just be sure to always make at least minimum payments - on time; otherwise, you risk facing higher interest rates and damaging your credit score.
Also, this may be the one time it makes sense to suspend 401(k) contributions to accumulate more cash. If you later determine your job is safe, ask whether your employer will allow a year-end catch-up contribution.
Protect your 401(k). After being laid off, you have several options for your 401(k) balance:
- If allowed, leave it in your former employer's plan, (Although, if it's less than $5,000, you may be required to close the account.)
- Roll it over into a new employer's plan, if it has one.
- Roll it over into a regular or Roth IRA. (With a Roth, you'll pay income tax on the amount when filing this year's taxes; however, you won't be taxed on subsequent earnings at retirement).
- Take a lump-sum cash payout. (Rarely a good idea. It significantly reduces your retirement savings and you'll owe income tax on the amount plus a 10 percent early withdrawal penalty unless you're over age 55 or disabled.)
Also note that outstanding 401(k) loans must be repaid, usually within 30 days of leaving your job, or you'll owe taxes and an early distribution penalty if you're under age 59 ½. Consult a financial professional to learn more about the financial consequences of 401(k) distributions.
Being laid off can be very stressful and expensive, but if you're prepared with a good game plan, you can minimize the damage to your financial well being.