Most people experience career uncertainty at some point in their lives. It can be difficult and scary to contemplate a job loss, career change or relocation. Fortunately, a little bit of planning can go a long way toward ensuring your financial security during a period of unemployment or job transition. The following tips can help you prepare.
#1 – Stash away some extra cash.
One of the best ways to prepare for a period of career uncertainty is by increasing your cash reserves. You may need to live off your savings for a period of time, so it is important to save as much as possible while you still have a source of income.
A general rule of thumb is to maintain three to six months of living expenses in a liquid account. However, if you work in an industry that has recently experienced significant upheaval, it may make sense to save enough funds to cover a longer timeframe.
In addition to helping you pay for your daily living expenses, having an adequate source of savings can give you more time to find the perfect next career move, rather than having to rush into a less-than-ideal job just to cover your bills.
#2 – Pay off high-interest debt.
Debt is the enemy of financial freedom. The sooner you pay down your high-interest debt, the sooner you will be able to focus on your career goals and wealth building opportunities. Consider implementing one of the following two strategies for paying off your high-interest debt.
- The snowball method, which involves paying off debt with the smallest balance, then moving on to debt with the next smallest balance, etc.
- The avalanche method, which involves paying off debt with the highest interest rate first, then moving on to debt with the next highest interest rate, etc.
#3 – Maximize your employee benefits while you can.
If you believe you may be facing a period with no benefits, consider how to make the most of your existing benefits while they are available. For example, consider scheduling doctor’s appointments and refilling any prescription medications while they are still covered by your health insurance. If your employer does not pay out unused vacation days, you may want to use them while you still can.
#4 – Find ways to lower your expenses.
As you prepare for a job loss or transition, consider how you can reduce your discretionary expenses. This may mean creating a budget and more closely tracking your spending to identify and eliminate unnecessary expenses.
#5 – Understand your company’s severance package.
Severance pay is not guaranteed or mandated by law. And, companies are free to change their severance policies at will, so what was offered to employees in the past may not be available to you today. Regardless, it is wise to research your company’s current policies to understand what type of severance benefits you may be able to expect. This can be helpful in determining how long your savings and severance pay may last before you need to find a new source of income.
#6 – Consider what to do with your employer-sponsored retirement plan.
If you have an employer-sponsored retirement plan, such as a 401(k), you will need to decide what to do with it after leaving your current employer. There are typically four options.
- Take a distribution directly to yourself. While it may be tempting to cash out your 401(k) and use the assets to cover your living expenses, this option can have significant tax consequences. Tax-deferred retirement plans are required to withhold 20% for federal income tax on any amount distributed directly to an individual. At tax time, you will need to pay federal income taxes based on your normal tax rate. And, if you have not yet reached age 59 ½, you may be subject to an additional 10% early withdrawal penalty.
- Complete a direct rollover to an IRA. Directly rolling over your money to an IRA allows you to avoid triggering a taxable event. Your retirement savings can continue to grow tax deferred for your retirement, and you may have more investment options than were available in your employer-sponsored plan. The key is to ensure your assets are issued to the custodian of your IRA. If you take direct possession of the assets, you may be responsible for taxes and penalties.
- Complete a direct rollover to a new employer’s plan. If you begin a new job, you may be able to complete a direct rollover to your new employer-sponsored plan. As with a direct rollover to an IRA, it is important to ensure your current retirement account provider sends funds directly to the new plan. If a check is issued in your name, your old plan is required to withhold 20% in taxes, and you may be subject to additional penalties if the balance is not reinvested in a tax-deferred retirement account within 60 days.
- Keep your money in the current plan. If you have at least $7,000 in your account, your current employer may allow you to maintain a balance in the existing plan. Your savings will continue to grow tax deferred; however, you will no longer be able to make new contributions to the plan, and you may be responsible for paying recordkeeping and/or administration fees now that you are no longer an active employee.
Could you use some help preparing your finances for an upcoming career transition? We would love to have a conversation. To learn more, please contact us.
