If you're facing a layoff, you are likely experiencing a whirlwind of emotions. The uncertainty and frustration can feel overwhelming. While we can't take away the stress of this transition, the ArrowPoint Wealth Advisors team can help you understand the financial decisions ahead and give you a roadmap for moving forward with confidence.
The good news? You have more control than you might think. With some thoughtful planning, you can turn this disruption into an opportunity to protect your financial security and make smart choices for your future.
Your First 30 Days: Immediate Priorities
Review Your Severance Package
While not guaranteed, many employers offer severance packages during large-scale workforce reductions and restructuring. Take time to carefully review what's being offered:
- Payment structure: Will you receive a lump sum or continued payments over time? The timing matters for your cash flow and income taxes.
- Accrued Paid Time Off (PTO): Many companies pay out unused vacation and sick time. Check your company's policy and severance offer.
- Benefits extension: Some packages include continued health coverage or other benefits for a set period.
- Remember this: Severance packages are sometimes negotiable. Don't be afraid to ask about the timing of payments, continuation of benefits, or outplacement services.
Tax consideration
Severance pay is taxed as ordinary income. If you land a new position quickly, you could end up in a higher tax bracket for the year. This is not a bad problem to have, but work with your ArrowPoint tax advisor to adjust your withholdings to avoid surprises at tax time.
Secure Your Healthcare Coverage
For most Americans, losing a job means also losing employer-sponsored health insurance. Here are your main options:
- COBRA: This lets you continue your current plan, typically for up to18 months. The catch? You'll pay the full premium, and potentially a 2% administrative fee since your employer is no longer contributing.
- Spouse's plan: A job loss qualifies as a life event, allowing you to join your spouse's employer plan outside the normal enrollment period.
- Healthcare Marketplace: Depending on your income, you may qualify for subsidized coverage through the Affordable Care Act marketplace.
Pro tip: You do not have to decide on COBRA immediately. You have about 60 days to elect coverage, and it can be applied retroactively to your first day of eligibility. This means you can wait and see if you need it but make sure to elect and pay your premiums in full within that window if you do. This gives you breathing room while you evaluate your options.
Maximize Your Retirement Plan Contributions
If your employer offers a 401(k) match, consider maximizing your contributions before your last day to capture those matching dollars. However, be sure you understand:
- Your vesting schedule: You might forfeit unvested employer contributions if you leave before they fully vest. For example, if your company uses a three-year cliff vesting schedule and you're in year two, you could lose those employer contributions if you don't stay until year three.
- Your post-employment options: Once you leave, you'll typically have four choices: leave the money in your current plan (if allowed), roll it into your new employer's plan, roll it into an Individual Retirement Account (IRA), or cash it out (not recommended due to taxes and penalties).
Each option has different implications for costs, investment choices, services, and your personal goals. Don't rush this decision and work with your financial planner to review your retirement plan and determine the best path forward.
Your Next 60 Days: Longer-Term Considerations
Address Equity Compensation and Incentives
If you have stock options, restricted stock units (RSUs), or performance bonuses, your severance package should outline what happens to these. Common scenarios include:
- Stock options: You typically have90 days after your termination date to exercise vested options. Miss this window and they expire worthless.
- RSUs: Unvested shares are usually forfeited unless your severance agreement states otherwise.
- Performance bonuses: Check whether you're eligible for a prorated payout based on time worked.
These decisions can feel complex and have significant tax implications. Working with a financial advisor who understands equity compensation can help you make informed choices that align with your overall financial picture.
Consider Whether It's Time to Retire
For those later in their careers, an unexpected layoff can sometimes become an unexpected opportunity. A severance package might provide the financial cushion needed to move your retirement timeline forward, or this transition might simply shift your priorities in ways that make retirement more appealing.
Now is the time to pull out your financial plan and ask the hard questions:
- Can your retirement savings support your desired lifestyle and is it properly invested?
- How will healthcare costs be covered until Medicare eligibility at 65?
- What does your Social Security claiming strategy look like?
- How does the severance payment impact your overall retirement readiness?
If you have been working with a financial advisor, schedule a meeting to stress-test your retirement plan. If you don't have an advisor, this might be the perfect time to find one.
Putting It All Together
A layoff isn't just a career transition; it is a financial inflection point. The decisions you make in the coming weeks can have lasting impacts on your financial security. By coordinating your approach across these key areas, you can reduce stress and avoid costly mistakes during an already difficult period:
- Cash flow planning
- Tax strategy
- Healthcare coverage
- Retirement and investment planning
You Don't Have to Navigate This Alone
Facing a layoff is overwhelming, and itis okay to feel uncertain about the path forward. But you don't have to figure it all out by yourself. Thoughtful planning can help turn uncertainty into clarity and protect your financial future as you move into this next chapter.
If you're going through this transition, Our ArrowPoint team is here to help. Let's work together to build a plan that gives you confidence and peace of mind.