How Do I Plan In Advance For Job Loss?

It often comes as an unexpected surprise when you get laid off, but as we’ve learned from recent events, it can happen to anyone at anytime, and it is critical that you take action now to ensure you are prepared for the unexpected.  What are some ways we can prepare for a possible job loss, and what should we do if it unfortunately does happen?

First, some general preparations we all should take, no matter how secure our job seems:    Ideally, we should have 10% of our annual income in a safe emergency account we can access immediately, and another 20% of our annual income in additional reserve, again in a safe account, but perhaps in certificates of deposit or money market accounts.  That amount may seem insurmountable, but don’t let that discourage you.  Start small and be faithful.  In a world where things seem so out of our control, working on a goal like this can go a long way toward the peace of mind that comes from doing something to improve the situation.  Work hard to reduce consumer debt, and pay it down so your monthly obligations are more manageable.  Track your spending so you know where you stand; take a good look to see if you can easily cut some things out of the budget now and stash the cash you save.  Note where you could cut deeper if need be.  Open a home equity or other line of credit now, while you are employed, to have that available if you do lose your job.

If a layoff seems imminent:
Start by continuing to build that emergency fund.  If your company has discontinued the 401(k) match, a job loss seems inevitable, and you have very little resources other than your retirement account, you may want to consider suspending your contributions and saving outside of your 401(k), first in a Roth IRA if you are eligible, and after you reach the maximum, to your emergency fund.  If you feel that you will have to access your retirement funds during the period of unemployment, it is better to have it outside of a retirement account, rather than possibly being subject to an early withdrawal penalty.  Plan a new budget for a time of unemployment, taking into consideration reduced commuting and child care costs, but increased job hunting expenses.

Understand the options for your benefits now, and if you don’t, talk to your human resources department to find out the details.  For instance, if you are offered a severance package, will you also be eligible for unemployment?  If you have an outstanding 401(k) loan and lose your job are you required to pay it back right away, or is there a payment plan option?  If you will not be able to repay the loan, it will be considered a distribution to you, and will be subject to tax, and, depending on your age, possibly an early withdrawal penalty.  How much is the full amount of your health insurance premium?  Can you elect to “port” your life insurance benefits so that you own them?

If you do lose your job:
You may be able to continue your health insurance benefits under the COBRA provision, for up to 18 months.  You have 60 days to elect coverage, and it can be retroactive.  If you decide on day 53, for instance, that you want the coverage, you will pay the retroactive premiums and have coverage back to the original date.  It is important not to let your health insurance to lapse more than 63 days, because health insurers cannot deny coverage to someone with a preexisting condition if insurance was lapsed within that time frame; longer than that, and they can.  Price individual policies as well, and compare.  The new stimulus package includes a provision for COBRA premiums to be subsidized up to 65% of the premium cost for up to 9 months.  To be eligible, you must have been involuntarily terminated on or after September 1, 2008 and December 31, 2009.  If you lost your job during that period, and were covered under the health plan at that time, you will get another chance to elect COBRA and take advantage of this new subsidy.  Your employer should be contacting you.

If you are offered a severance package, and it does allow for you to collect unemployment simultaneously, apply for unemployment right away, so you don’t lose any time you are entitled to.  This is the time to put the new budget into play.  If you are collecting both unemployment and severance pay, you may find that you have more than enough income for the time being.  Don’t spend the difference, save it, to fund your own continuation of your severance.  If it looks like your sources of income will run out before you find a new job, make those deeper cuts in the budget, and call your creditors to ask for forbearance on your loans and credit cards, explaining the situation.

If you have a retirement plan
to rollover into an IRA, take time to consider your options before making any decisions.  Don’t lock yourself into an annuity or a “B share” mutual fund with a surrender period—in other words, no long term commitments with the money (other than keeping it inside an IRA and not in your hands); stay flexible.  Don’t cash in 401(k) or retirement accounts unless you have run out of options.  Tap into non retirement accounts first, such as savings accounts or CDs, or borrow from a cash value life insurance policy if you have one.  Access that line of credit, work part time, or look to family for help if possible.  If you have no choice but to access your retirement account, something called a 72(t) may help; it is a way to take substantially equal periodic payments from an IRA without incurring an early withdrawal penalty (consult a tax or financial professional first).   Stock options normally have a time limit after termination in which to exercise them, but there can be significant tax consequences and the decision should not be made without individualized professional advice.  For any of these issues, a few hours invested with an objective planner can not only keep you from making expensive mistakes, but can help you sort out your choices while keeping emotion out of the decisions.

Finally, losing a job is a tremendously stressful time.  So take good care of yourself, surround yourself with positive people, and keep a grateful heart.

About the author

Erin Baehr CFP®, EA

Financial Advice for Everyday Life

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