The loss of a job can cause serious stress, personally and financially. To help you navigate this disruption in employment, Agent of Wealth Podcast host Marc Bautis lays out exactly what you should do when you lose your job. All of the steps discussed in this podcast episode are succinctly listed in this Job Loss Checklist.
If you are still employed, you’ll still want to tune into the episode to understand how you can better prepare yourself in the event a job loss occurs in your future.
In this episode, you will learn:
- How to run a job loss scenario.
- After you lose your job, how to create a plan for depleting your reserves (or savings).
- A variety of health insurance options for those who recently experienced a job loss.
- How to put a budget, or spending plan, in place after the loss of an income.
- How to prepare your finances for a job loss, in the event that it does occur in the future.
- And more!
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis.
Although the unemployment situation is no where near as bad as it was at the height of the coronavirus pandemic – when the unemployment rate rose to a record high of 14.7% – economic uncertainty is causing some changes to U.S. businesses.
In today’s corporate world, business closures, downsizings and reorganizations are increasingly common.
As of January, the unemployment rate is 3.4%, with 5.7 million Americans unemployed.
The loss of a job can cause serious stress, personally and financially. To help you through a disruption in employment, we’re going to spend this episode talking about what to do when you lose your job.
We’ll talk about:
- Severance options
- Employer benefits
- Eligibility for unemployment benefits
- Budget adjustments
- Health insurance options
- Employer-sponsored retirement accounts, stock plans, and other benefits
- Income tax considerations
- Retirement or future employment options
Everything we discuss today is included in a complimentary, interactive checklist that – if you’ve just lost your job – is an outstanding resource. Feel free to follow along with the checklist as I talk through some of the issues.
Now, if you’re still working and have a job, you may be thinking that you should go listen to another podcast… But in this episode, we’re not only going to talk about what to do if you lose your job, but also how you can be prepared should you lose your job in the future – because there are steps that you should take beforehand.
How to Run a Job Loss Scenario
First, I want to talk about an exercise that I recommend to everyone, which is to run a job loss scenario. This will help you understand the financial impact should you (or your spouse) lose that income stream.
If you are married, this exercise usually includes three scenarios.
- What would happen if you lost your job?
- What would happen if your spouse lost their job?
- What would happen if you and your spouse both lost your jobs?
When running this scenario, the first area you’ll look at is your reserves – also known as your emergency fund, or, in some cases, your savings. You’ll need to determine:
- How much reserves do you have in place?
- If you pay your monthly expenses using those reserves, how long will it be before the funds run out?
A lot of times, I find that people are better prepared than they think – especially if they have an emergency fund in place.
Related: Why You Need an Emergency Fund
So, running these scenarios will allow you to see – on paper – how long you can withstand a job loss. And it can help relieve some of the stress and anxiety that you experience when you lose your job.
Step two in the exercise is to set up a plan for depleting the reserves that you determined in the first step. The order of depletion might go something like this:
- Utilize funds in checking account.
- Utilize funds in savings account.
- Utilize funds in investment account.
- Utilize home equity line of credit.
- Take a loan out on spouse’s 401k.
We’ll talk shortly about some other options that you may have, but the goal here is to build a plan that you can follow until you get another job.
Retirement Account Options
I mentioned a 401k loan. One thing to note is if you lost your job and you have a 401k loan out already, you have to check your options. You can take the loan as a distribution, but then you may owe taxes in the 10% penalty if you’re under 59½. Paying back that loan can vary, plan by plan, although most loans must be paid back by the due date of your tax return for the year that you left your employer.
If you are at least 55 years old, you may be eligible to begin 401k distributions without incurring a penalty. A lot of people think that magic number is 59½, but there are some options to explore if you are 55+.
Some other examples of reserves could be cash in a life insurance policy, which you could borrow against or take a distribution from.
If you have a Roth IRA, you may be able to pull out your contributions tax and penalty free. Unlike traditional IRAs – which require you to be 59½ to take the funds – with the Roth, you already paid taxes on your contributions into it and therefore, you have more access to those funds. Should you need, you can use them.
Just remember, any gains in a Roth account need to remain in the account until you are 59½, or you will be penalized 10%.
Stock Plan Options
Next, we’ll talk about if you have stock options in the company you’re leaving…
If they’re unvested stock options, you want to review your equity plan documents. It’s a good chance that you may likely forfeit some or all of those options. You should look at the vesting schedule to understand what will vest next, as it might be possible to coordinate your departure with that schedule.
If they are vested, you want to review your post-termination exercise periods. They’re usually about three months from your last day of employment, but you have to check because in some cases, you do have to exercise the options before you actually leave the company.
If you were terminated for a cause, your vested stock options may be canceled.
Now, if the company stock was private, you may have to consider the shares illiquid, and there may be a drawback to repurchasing the rights to them.
In summary, check what your options are and what you’re entitled to, then come up with a plan from there.
Credit Options: Credit Cards, Home Equity Lines, Asset Lines
As we’re talking about reserve options, at the very bottom of the list is using credit cards. Credit cards are usually the last resort, because the interest rates are typically the highest on them.
Instead of using credit cards, you can explore a home equity line or an asset line.
Now, a home equity line of credit (HELOC) is probably something you want to do before you lose your job. And you can get a home equity line of credit in preparation for an unexpected life event, even if you don’t have any short-term plans of using it.
The reason why you’d get a HELOC before a job loss is because it’s hard to get one if you don’t have a job – the banks might not look at you favorably in terms of lending, even if the house is collateral. So it usually makes sense to take out a HELOC while you’re still employed, even if you don’t need it.
An asset line of credit is similar to a HELOC in that it sort of operates as a credit card with usually lower interest rates. But it’s an asset that is used as collateral. The most common type we see is an asset line on an investment brokerage account, where the banks use the stocks or securities in the account as collateral.
Income Tax Considerations
If you just lost your job, there are some tax items to consider.
First, if you’re going to have a low income year, you may want to look into a Roth conversion. Now, this will depend on what tax bracket you expect to be in, how much you have left in that bracket before bumping up to the next, and whether or not you have the cash available to pay the tax on the conversion.
I know this is kind of counterintuitive for some… We’re suggesting you look into Roth conversions – which require you to pay taxes – in a year that you lost an income stream. But if you’re typically a high-income earner and you have the cash available, it is a strategy to consider in the year that your income is less.
Also, if it is a low income year, you may be able to make contributions directly into a Roth – you may not be phased out.
Health Insurance Options
Next, let’s talk about health insurance considerations.
If you expect to lose your health insurance soon, you want to make sure that you’re up-to-date on any medical exams, dental exams and vision exams before your health insurance ends. A lot of people forget to do this before they lose health coverage, just because there’s so many other things going on.
Depending on your situation, you may have a couple of options for health coverage moving forward.
If you’ve worked for a company with 20+ employees, you may be eligible for COBRA, which typically allows a former employee to stay on the employer’s health plan for 18 months. However, it will be more expensive, because you will have to pay both sides of the coverage. That’s because, prior to losing your job, it’s likely that your employer was paying a portion of your health insurance. If you’re eligible for COBRA and stay on that same plan, you’ll be responsible for paying the full premium. You usually have an election period of 60 days.
If you were terminated involuntarily, you may be eligible for a premium subsidy.
If you’re married and your spouse has a health plan through their employer, you may be able to join that plan.
Or, you may be eligible for health insurance coverage through the health insurance marketplace if you enroll within 60 days of losing your job. That’s according to these special enrollment period rules, which includes job loss.
If you are 65 or over, you may be eligible to sign up for Medicare if you haven’t already done so. The special enrollment period for parts A and B is an eight-month window beginning the month after the earlier of the end of your employment or the time of your employer provided health insurance ends.
So the last two things I wanted to cover are relevant anytime, but especially when you lose a job.
How to Create a Spending Plan
The first: Budgeting. The word “budget” has become taboo in the financial industry, so we’ll refer to it as a spending plan.
Related: How to Create a Monthly Budget
Some people are really in tune with where their money is going, whereas others have no clue. If you’ve just lost your job, this is really important. So if you aren’t one to usually track your spending, I recommend you review the past month’s expenses to see exactly where your money is going. And then, answer the question: Is your money going to the things that are important to you?
I recently read a study that said one of the best ways to grow your wealth is to have a crystal-clear understanding of where your money is going. The best way to do this is to conduct a monthly review of your expenses. Or, you can track your expenses as they occur.
The Importance of Networking
The last thing to focus on is your network. A lot of people are reluctant to network, but here are some facts that should provide motivation to do it.
According to HubSpot, 85% of jobs are filled through networking. And, according to a CNBC article, 70% of jobs are never published publicly. They’re either posted internally, or they’re created specifically for candidates that the hiring manager recruited, or met through networking.
According to LinkedIn, 70% of professionals hired in 2016 had a connection at the company they were hired at, and 80% of professionals consider networking vital to their career success.
So you definitely want to build your network, whether or not you have a job. But if you did just experience a job loss, I recommend you individually call or email those in your network to let them know about your employment change. Most people update their LinkedIn status or send a mass-email, but I think taking the time to connect individually is much more effective.
Remember, networking is a two-way street. So when you talk to someone, or write to someone, ask how they are doing, and show genuine interest in their business endeavors.
Networking is about giving and not just receiving.
In closing, losing your job can leave you feeling hopeless, stressed and unsure of what to do next. When this misfortune strikes, it may be a good idea to hire professional help to get your finances in order and limit any lasting damage.
There’s just a lot of things going on, and even though you probably have more time now to focus on some of these, just making sure you’re doing the right thing with your finances professionally can help.
Not only can a financial professional guide you through a period of unemployment, our job as Financial Advisors is to weigh a future filled with unknowns. Therefore, we can work to put you in a better position in the future, should you experience another unexpected life event like a job loss.
Currently, we are accepting new clients. If you’d like to schedule a complimentary consultation with our advisors, please do so below.