The numbers are striking: About 1.7 million people, on average, lose their jobs every month.
Those figures represent little more than 1 percent of the workforce, but they still underscore just how many people face the sort of upheaval that accompanies the loss of a job or a forced retirement. Beyond the emotional toll, many individuals agonize over potentially life-altering financial decisions, including how best to manage any money they may be going out the door with.
The latest collection of employers cost-cutting their way to improved profitability reads like a who’s who of U.S. business: American Express, eBay, Coca-Cola, DreamWorks Animation, General Mills, Halliburton, IBM, United States Steel.
Many of their departing employees will confront similar financial decisions, some of which may require immediate attention, which only amplifies the anxiety levels. What sort of severance am I entitled to – and how long will it last? What are the tax implications? I am lucky enough to have a pension – but how should I take it? And what about my 401(k)?
“There is a lot of stress about what decisions they need to make now,” said Lisa Brown, a certified financial planner at Brightworth, an advisory firm in Atlanta, “and which they need to make at a later date.”
She said she saw so many of the same queries from executives and employees at Coca-Cola – which said last month that it would cut up to 1,800 jobs – that she wrote a guide just for them, which is posted on her firm’s website.
Many of the questions and issues are universal, regardless of where you work.
Some of most common:
• Initial analysis – If you are being laid off (or contemplating a sweetened package encouraging you to leave), the most pressing issues are obviously income-related: Does any extra money let you retire a few years ahead of schedule, perhaps with some part-time work? Or does it offer enough so you have a cushion until you find your next job? How much income do you need to live right now? And how long can you go, given your severance?
If your employer is dangling a special severance deal, you first want to figure out how the payout and benefits differ from what you would receive if you left on your own terms later (when you retired or quit). And if you don’t take it, what are your chances of being laid off, anyway?
There is usually a lot of fine print to sort through, so be sure to parse it carefully. In some cases, a layoff may mean you have less time to exercise your stock options, for instance. In other cases, the severance package may offer medical coverage for an extended period of time. Depending on your job level, you may also be in a position to negotiate those details, financial advisers said.
• Maximize tax savings – Regular income taxes will generally be withheld from your severance payment, in addition to payroll taxes. But receiving a severance payment can quickly catapult an employee into a higher tax bracket – particularly if it occurs at the end of the year – and the taxes withheld may not be enough to cover your entire bill.
Increasing your pretax contribution to your 401(k) plan can help minimize the tax burden: Individuals can save up to $18,000 in 2015, while those 50 and older can save an additional $6,000. Severance payments typically cannot be automatically deferred into a 401(k) plan, and you may not have much time left on the payroll, so you should probably make the adjustment to your savings plan right away, Brown explained. You might want to save big chunks of your paycheck, especially if you have enough emergency savings or other money to live on. Alternatively, married people can have their spouses stow away more money to offset any severance payment.
People enrolled in high-deductible health plans should also consider increasing contributions to their health savings accounts, where individuals can save up to $3,350 in 2015 (or $6,650 for families). You take this money with you, and it has a triple tax benefit: Contributions reduce your taxable income and it grows tax-free. Withdrawals are tax-free, too, as long as the money is used for qualified health expenses.
• Severance – This is often paid in a lump sum on the company’s schedule. But if it comes at the end of the year, inquire whether you can receive part or all of the payment early in the next tax year, when you may be earning less money. Have an accountant run the numbers (yes, hire one) and set aside money from your severance to cover any extra taxes.
• Pensions – People who expect to continue working can defer any big pension decisions for now. But individuals who decide to start taking the benefit will need to choose whether to take a lump sum or a lifelong annuity payment, and whether to cover a spouse’s life (and for how long). “That could be the single biggest decision that impacts their lifetime income stream,” Brown said.
It is hard to make any generalizations about such a complex calculation, though some advisers said their clients tended to favor the annuity options after running their numbers.
That won’t be the right choice for everyone. But one way to approach the decision, said Michael Kitces, director of planning research at Pinnacle Advisory Group, is to consider a few big, and admittedly unknowable, questions. First, think about your health and life expectancy. If you take the pension, how long will you (and your spouse, if you choose an option to cover both of your lives) most likely receive payments? Next, what kind of return would you need to earn to generate the same income over that period?
• 401(k) – You don’t have to deal with this right away, but you should eventually evaluate whether it pays to keep the money where it is (particularly if there is an array of solid, low-cost index funds) or whether to roll it over into an IRA or a new employer’s plan. If you move the money, make sure it is a “direct” rollover, which will avoid any tax complications.
If you are 55 or older, consider leaving the money in the plan, especially if you may need to dip into it over the next few years: Normally, people who withdraw 401(k) money before age 59½ face a 10 percent penalty, but those who leave their employers at age 55 or older do not.
• Unemployment – Check with your state to see how your specific circumstances may affect your eligibility for unemployment benefits, how much you might actually receive and for how long. In New York, for instance, your payments may be reduced if you receive a company-provided pension or severance benefit. You may not be eligible if your departure was considered voluntary, though the New York governor’s office said it encouraged people at least to file for unemployment.
• Health Insurance – Workers tend to worry whether there will be a gap in coverage between the end of their employer-provided coverage and the beginning of COBRA, Brown said, but there aren’t usually any issues. She still suggests making any doctor appointments and filling prescriptions before you leave to reduce the administrative burden. And the state and federal health insurance exchanges may offer less expensive options than COBRA.
• Get help – If there were ever a time to seek professional help – an accountant, an unbiased financial planner or both – this is it. This is doubly true for people for whom retirement is on the horizon. Work only with planners who charge for their advice and who are legally required to put your interests first. Mistakes can be costly – and permanent – particularly if you end up working with professionals who invest your money in products such as fixed indexed annuities, that offer them lucrative commissions or kickbacks at your expense.