One potential challenge facing workers in their 50s and 60s in this difficult economic environment is getting laid off before they are ready to retire. Sadly, there is no shortage of news stories about major companies laying off thousands of employees. For younger folks, a layoff is likely to just be a small bump in the road. In a few months, as the economy recovers, they will likely be able to secure a new job. However, it’s not as simple for people nearing retirement.
The repercussions for soon-to-be retirees who are being let go from a job late in their career can be disastrous financially. Most investors plan to contribute meaningfully to their savings as they simultaneously hit their peak earning years and no longer have the expenses that come with raising children (e.g. yeshiva tuition). Dipping into one’s savings five to ten years earlier than planned, instead of continuing to save and invest, can lead to very challenging years ahead.
The best approach for this type of frustrating situation is to be proactive. Procrastination can further exacerbate the negative impact on one’s finances for years to come. Below is a list of planning items to consider after one is laid off late in a career:
- File for unemployment insurance: When dealing with the shock of being laid off from a long-time employer, it may be hard to determine what to do next. One of the first things to consider is filing for unemployment insurance once eligible. This may be overlooked by higher earners, where unemployment checks may be quite modest compared to previous earnings. However, it will serve as an income stream to help with some basic expenses. There is no reason not to claim the money to which you are entitled.
- Adjust your budget: If you were a prudent budgeter throughout your career, you probably have a six-month emergency fund for situations like this. That’s great, but another precautionary measure is to reassess your expenses. There are certain expenses, like mortgage payments, rent, utility bills, and groceries, that can’t be reduced. However, canceling your next vacation, refraining from dining out, and postponing the kitchen renovation are all actions that can be taken until your financial future is more certain.
- Assess your savings: This is a good time to take stock of what you have saved up. Set a time to meet with your financial advisor to understand expected income from your current level of assets should you need to enter the decumulation stage of your financial life today. Looking at cash flow projections, reassessing asset allocation, and determining if you need to make lifestyle changes are all important decisions to make in the event that you are unable to get back to the same income level.
- Evaluate your Social Security options: The earliest age to start receiving Social Security retirement benefits is 62. At that age you can collect 75% of the monthly benefits. For folks born in 1960 or later, age 67 is when you can collect 100% of your benefits. If you have a severance, emergency fund, or some other income sources, then waiting until full retirement age to claim benefits could be the best plan. However, if that is not a viable option, claiming now with a reduced benefit can be helpful from a cash flow perspective.
It’s important to note that while you are allowed to collect Social Security and unemployment benefits simultaneously, depending on where you live, your unemployment benefits might be reduced. If you have income coming from outside sources, it’s important to do your due diligence before claiming Social Security.
- Get health coverage: After lost income, one of the biggest concerns for workers that lose their job is the loss of their health insurance. If you are already 65, you can enroll in Medicare. If you are younger than 65, paying for COBRA can allow you to retain your old health plan. However, individuals may be required to pay the entire premium for coverage, up to 102% of the cost to the plan. An alternative option is to buy a new plan on the open market.
Be mindful that a Health Savings Account (HSA) is owned by you, not your employer. Therefore, you can continue to use it for qualified expenses even after getting laid off. This will be helpful for any medical expenses that arise while between jobs.
- Look for low income planning opportunities: Being out of work and having a lower income may actually present excellent tax planning opportunities for investors. Some strategies to consider, after consulting your tax advisors, include converting a Traditional IRA to a Roth IRA, exercising stocks options, maximizing IRA distributions, and selling appreciated stock. Each one of these decisions requires careful consideration of other aspects of your financial life, but being aware of potential opportunities, instead of just focusing on the obvious negatives, can lead to meaningful tax savings.
- Rebrand yourself: Immediately applying for new jobs is an obvious decision. However, one of the reasons older employees may lose their jobs is due to an antiquated skill set. It may be helpful to reposition your skill set when job hunting. After spending several decades in a particular field, you are bound to pick up many things that the 25-year-old rookie who just replaced you does not yet possess. This includes experience, contacts, industry knowledge, secrets of the trade, and more. Leveraging these insights can lead to a career in a different job function within the same field.
- Start a consulting business: Again, knowledge amassed during years of experience in your field can serve as a valuable resource to many. One of the smartest moves I have seen from laid off executives was setting up their own consulting firm. In doing so, they stayed active in their field, prevented gaps in their resume, maintained an income stream (even if choppy), and continued to network with like-minded professionals. While the transition from a high earning C-suite employee to an entrepreneurial consultant may be difficult, the benefits sure beat spending years unsuccessfully searching for work.
- Work longer than planned, but at a less stressful job: Changing careers may be a good opportunity to continue earning an income while reducing stress and improving your lifestyle. For example, if you worked as a corporate attorney at a large law firm, then switching to a not-for-profit organization will surely lower your income. You may need to work longer to reach your financial goals. However, you’d also be trading regularly spending 70+ hours a week in the office for a significantly improved work-life balance. This strategy may have been unthinkable at your old job, but the ability to think outside the box is essential in not derailing your financial goals.
- Accelerate your retirement plans: If downsizing or relocating were on your list of things to do in retirement, accelerating those plans may provide the cost savings you need in order to comfortably retire today. Those two items alone offer many potential savings, including reduced expenses associated with upkeep of a larger home, taxes, commuting to work, insurance, and social pressures that may not be present in retirement. It’s advisable to meet with your financial advisor and accountant to help run the numbers and have a conversation about the impact of such a decision. You may even leave the meeting feeling pleasantly surprised.
While losing your job later in life is difficult, it can also serve as a wakeup call to get your finances in order before entering your official retirement. Getting a handle on your budget, organizing your finances, and evaluating your insurance coverages are all excellent ways to prepare for life after work. Furthermore, adjustments to your lifestyle by working as a consultant or in a different career can be great for mental health as you enter retirement. Although many people look forward to leaving the workforce, choosing to continue working, gradually transitioning out of corporate America to a less stressful job, helps retirees keep active, have daily structure, and stay mentally sharp, while also providing some additional income to delay living strictly off their savings.
As the challenging economic climate continues, there is no doubt that the trend of prematurely leaving the workforce will continue. Having a strategy in place for that possibility is the best way to preserve your finances as well as the retirement you envisioned.
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