Unemployment is an event that most of us encounter – whether voluntarily or not – at one point during our working years. Sometimes, it’s neither planned nor expected, and comes as both an emotional and financial shock. Ideally, you have three to six months of living expenses tucked away for the unexpected as an emergency reserve. In reality, you may be among the majority of Americans who don’t have enough savings to cover a $500 emergency. If you find yourself in a financially-stressful situation, we can help you identify and evaluate your options, and prepare a plan to get through a period of unemployment, should it occur.
KNOW YOUR BENEFITS
Familiarize yourself with the benefits offered by your company and your state unemployment office.
Does your employer offer an outplacement agency for employees who have been laid off? Do you qualify for severance benefits? Contact your company’s human resource department for more information.
What is your income eligibility for unemployment? Unemployment benefits are especially important if you are laid off. You may be able to manage without them, but remember that you have worked to put money into the system and it is there to help you. Be sure to get the ball rolling early, as the unemployment process can be lengthy.
MAKE RISK MANAGEMENT A PRIORITY
While it may be tempting to let your insurance coverage lapse, “just until I get a new job,” a health or premature death event without coverage could be financially disastrous. Do your best to keep insurance coverage – and that peace of mind — in place.
Health insurance. If you won’t receive a severance option with salary continuation, and you do not have outside health insurance, or a spousal insurance options, you will need to obtain coverage.
- Previous Employer. COBRA provides the right to temporary continuation of health coverage at group rates for former employees, spouses, and dependent children, as well as retirees. Check the S. Department of Labor website for guidelines regarding who may receive COBRA benefits and for how long.
- Private insurance. You should also compare the COBRA rate of health insurance to rates of individual health insurance, as you may have more flexibility to purchase only those features important to you, and at a lower cost, privately. Additionally, if you don’t qualify for COBRA, or your COBRA coverage period runs out, you may need to purchase individual health insurance.
Life insurance. Employer-provided life insurance generally lapses with unemployment. If you haven’t purchased private insurance because you had life insurance coverage through your employer, you may need a life insurance policy. If you have existing outside policies, do all you can to keep them in force. If you can’t manage the premiums, you may have options to reduce coverage – and premiums – rather than drop your insurance altogether. Don’t let short-term setbacks eliminate the premium you’ve invested to safeguard your loved ones.
MANAGE DEBT CAREFULLY
Track your dollars and cents
Rather than thinking about the term “budget” as a dirty word, view your budget as a powerful — and empowering — tool, one that can make a real difference in your financial health. Use it to identify spending items you can reduce, prioritize other spending, and keep other goals on track.
One of the greatest insights a budget can provide is an understanding of essential (housing, electricity, heat) and nonessential (daily latte, dining out four times a week, paying overdue charges on credit cards) expenses.
Avoid accumulating new credit debt, if at all possible
While having a budget is always helpful, it becomes critical now. There is a grieving process associated with the loss of a job, as with any other loss, and too often individuals use denial as a coping tool. Don’t get mired in expensive and unnecessary debt. If your fixed expenses are burdensome, look at other options for bridging the income gap before turning to credit cards.
If you have existing credit debt with untenable minimum payments, contact existing creditors to negotiate reduced payments while you search for employment.
If find yourself unable to make student loan payments, call your servicer immediately. Federal loans may qualify for unemployment deferment or forbearance and will allow you to postpone making payments for 1-3 years while you look for a new job. Although private loans tend to be less flexible, providers may offer reduced or postponed payments as well.
Keep your credit in good order
Be conscious of your credit score. Lending institutions, insurance agencies, and prospective employers use this score to evaluate your responsibility and creditworthiness. The score dictates the rates you get on loans, the premiums you pay on policies, and sometimes whether, or not, you attain the job you want.
A free annual copy of your credit report is available at:
Be sure to correct any discrepancies on your credit report immediately to avoid costly changes to your credit score. The agencies offer procedures to help you do this. Your actual score isn’t free, but you can pay to receive it from any of the above agencies.
Again, it’s critical that you pay your bills on time and limit the amount of open credit you have. If your credit score is in good shape, be sure to keep it that way. If it’s already suffering, don’t let it get worse.
REVIEW YOUR RESOURCES
A net worth statement should itemize your both liabilities and your assets, and break down your assets into those which are “liquid” versus those that may not be easily accessible. This information will provide the groundwork for a financial strategy moving forward.
Frugally manage your emergency reserve
If you have set aside funds as an emergency reserve, now is the time to pat yourself on the back. Even with a reserve, you should carefully manage your expenses to stretch those funds as long as possible. Hopefully, your period of unemployment will be short, but at this point, you likely aren’t sure. When you are newly employed, make replenishing your emergency reserve one of your priorities.
Safeguard your retirement savings, as best you can
While tapping into retirement savings should be a last resort, you may not have a choice. If you find yourself in this situation, you will be wise to get professional guidance to understand distribution options, avoid unexpected taxes – and penalties, where possible — and weigh the long-term impact of premature retirement distributions on your financial goals.
- Retirement account distributions.
- 401(k)s, 403(b), and traditional IRAs: If you must withdraw funds from your retirement account, be aware that premature distributions (prior to age 59½) are generally subject to regular income tax and a 10-percent federal penalty. Some states also have an additional state penalty. Where a penalty applies, you will be wise to include it as additional tax withholding at the time of distribution.
- WARNING: Rolling a 401(k) that has an existing loan balance to an IRA will result in taxable income equal to the loan balance remaining at the time of the rollover.
- Roth IRAs: These IRAs are funded with after-tax dollars, and special tax rules apply to distributions taken from them that depend, in part, on how long your Roth has been open. Consult a professional to fully understand how a distribution from your Roth IRA might be taxed.
- Rollovers. When you leave your company, you are likely leaving behind a company-sponsored retirement plan. Understand your options, and their respective advantages and disadvantages, before moving those assets. You can:
- Leave the assets where they are. This option requires no immediate action on your part, and may be a short-term or long-term solution, depending on what investment options you have available in the plan, the ease of managing those assets, and your future plans.
- Roll them to a new employer’s plan. If your goal is to seek immediate re-employment, then you may want to leave the assets in your previous employer’s plan until you get information on a new employer’s plan. Most employer plans will accept rollovers from other employer plans – but not all. Considerations such as investment options, the amount of your rollover, and fees should be part of your decision process.
- Roll them to a traditional or Roth IRA. As with your other options, seek the advice of a financial professional to understand the implications before making rollover decisions.
- Pension plans. There are laws protecting you from losing your pension plan benefits, even in the event of a job loss; companies offering pensions must meet certain requirements and are held accountable by the Employee Retirement Income Security Act. Your company may allow you to take a lump-sum distribution of your pension benefits (which you can roll to an IRA) or leave your benefits in place. Several factors should be considered when deciding whether to leave your pension benefits in place or take a lump sum – where that is an option.
PUT A GOOD TEAM IN PLACE
While you may be able to manage some or all of the above actions yourself, you don’t have to field these issues alone. Your time may be more appropriately spent networking and discovering the next stop on your career path. For some, it may mean the decision to retire. Regardless, your financial professionals can take some of fear out of an unemployment event by helping you evaluate your situation, available resources, and options for bridging a gap in cash flow without compromising your financial goals and triggering avoidable tax. The number one priority when you’ve been downsized is safeguarding your well-being and that of your family. Be sure the financial professionals you choose to work with share the same priority.