Layoffs Coming? Control What You Can Control
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Layoffs are not a fun topic to talk about. Even thinking about it can be frightening. Nearly everyone has a layoff story, either from being laid off themselves or knowing family and friends who have been laid off. My father was laid off on my thirteenth birthday. It was a shock to all of us. The months that followed were tense and uncomfortable for my parents and our family. Thankfully, he eventually found another career that he enjoyed. As I've reflected on it over the years, I can still recall the sense of fear and insecurity that the news brought. Whether consciously or subconsciously, I know that experience and those emotions have impacted how I approach my own financial life.
How have layoffs impacted you and your family?
Have they impacted how you make financial decisions?
Layoffs are largely out of our control, but our ability to prepare for them is not. The following is a summary of some important financial strategies and questions to consider if you or a family member are facing layoffs. These ideas will not prevent a layoff, but they will hopefully embolden you to handle it with strength and confidence.
Emergency Fund
I know, I know, financial planners are always talking about emergency funds. But the risk of a layoff is one of the primary examples of why this contingency is important. Generally speaking, an emergency fund is a sum of money exposed to little or no risk, for example, in a savings account. The goal of this set aside is to preserve 3 to 12 plus months of living expenses in case of emergencies, i.e., medical emergencies, urgent home repairs, and yes, layoffs. The financial cushion will provide for short-term living needs while you pursue new employment. In order to stretch how long your emergency fund lasts or to prepare secondary sources of emergency funds, consider the following:
Reduce expenses: The rate at which you burn through your emergency fund will decrease if you are spending less. As painful as it is, the discretionary expenses are the ones that need to go first: streaming services, eating out, and vacations. Consider changing where you shop to a less expensive alternative. It's likely everyone can trim some budget item or find a less expensive source.
Contact Lenders: If you have debts, it may be beneficial to reach out to lenders to see if there is flexibility in repayment options. Any additional fees or higher interest rates should be considered before making any changes.
Home Equity Loan or Line of Credit: If you have access to your home equity, consider using this as a backup to your emergency fund. Pay close attention to the interest rates charged for borrowing this money. Once you have a stream of income again, consider repaying what you borrowed to end the interest payments. If you don't already have access to your home equity and want it, you should investigate how to do it with your lender before you are laid off, as losing a job may impact your ability to borrow.
Retirement Account Distributions: The main purpose of these accounts, obviously, is to fund retirement. But sometimes we are forced to prioritize our short- and intermediate-term needs instead of our longer-term goals. There are opportunities with accounts like Roth IRAs to withdraw contributions, not earnings. If you are at least 55, you might be able to take distributions penalty free from a 401(k). Fees and penalties may apply in several circumstances; visit the IRS website (https://www.irs.gov/retirement-plans) or contact a financial professional for more information.
Employer Benefits
Before and after layoffs, there are several things to consider or investigate with regards to employer benefits:
Health, Dental, and Vision Insurance: Will you have access to COBRA coverage? For how long? What will the premium be for you and your family if your employer is not contributing? What is the cost of adding an unemployed spouse or dependent children if your spouse has health insurance through their employer? If private insurance will be your only option, get premium estimates now by visiting your state's insurance marketplace.
Will you be entitled to back pay, sick pay, PTO payout, vacation time payout, or any type of severance? The severance answer may come with the layoff notice, but the back pay and sick pay type questions can likely be answered with a review of your pay stub and employer benefit documents.
Flexible Spending Accounts: If you have FSA funds, you might want to use them before they expire. For example, you could schedule medical appointments, buy new glasses, or buy eligible items that you could use while you're out of work.
Stock Options and Deferred Compensation: Read the details of your plan. Make sure you understand what will happen to these benefits and take appropriate action or seek assistance.
401(k) Loan: If you have a 401(k) loan with your current employer, the plan details may require repayment on separation from the employer. Plans differ, so take a look at the loan rules.
Other Insurance: Beyond health, dental, and vision insurance, are you relying on your employer for other forms of insurance? Some employers offer life and disability insurance. Before a layoff, now may be the time to research what the premium would be to replace the benefits that your employer is providing.
Discounts: Some employers offer group discounts on insurance, phone plans, and other important expenses in our lives. Will those carry on if you are laid off? How will it impact your expenses if the discounts are taken away?
Other Benefits: Does your employer offer access to physical well-being programs, mental health programs, disability support, financial planning support, legal support, or tuition support? Will that end if you are laid off? Take advantage of those opportunities as best you can before losing them.
Other Considerations
Unemployment Insurance: Benefits may be available in your state if you are unemployed through no fault of your own. Each state runs its own program; to learn more about your state, eligibility, and how to apply, start at the Department of Labor's website, https://www.dol.gov/general/topic/unemployment-insurance.
Social Security: If you are laid off close to retirement age, taking social security benefits earlier than your full retirement age may be a consideration. If you use your benefits early, your total benefits in the future may be less. This is something you should think about carefully before making any decisions. Consider talking to a financial professional before taking any actions.
Refinance Your Mortgage: At the moment, today's higher interest rates and lower house values may not make this a viable option. However, it is worthwhile to contact a lending professional to see if there are mortgage changes that could lower monthly payments or allow for the withdrawal of some equity to cushion the blow of layoffs. This is something to be done before being laid off, as lenders are less likely to lend to unemployed borrowers.
Budget Review: Take a look at your income and expenses. If income decreases, what expenses will be reduced first?
Communication
Losing a job can be a difficult and emotional experience, and talking to family about it can be equally challenging. Reflecting on my own experience, I wonder if my father had any idea layoffs were coming, and if so, would talking about it with his family have decreased the surprise and emotional impact? I have to imagine it would have. Here are some steps you can take to help the conversation go smoothly:
Prepare Yourself: Take some time to gather your thoughts and emotions before the conversation. Anticipate potential questions or concerns from your family and think about how you would like to respond.
Be Honest And Direct: Explain the situation to your family in a clear and straightforward manner. Share with them that you may be facing job loss and that you are doing everything possible to find another job.
Reassure Your Family: Let your family know that you have a plan in place and that you will take care of them. Explain the steps you are taking to provide for their needs and what kind of support you may need from them.
Listen To Their Concerns: Your family may have concerns or questions about the situation, so it's important to listen to them and address their worries. This may be a new situation that you are all navigating together, and there will be questions and opportunities for misunderstanding as everyone learns how to adapt and support each other during this period of transition. Answer their questions as honestly as you can and assure them that you will keep them updated on any developments.
Stay Positive: Losing a job can be a difficult experience, but try to stay positive and focus on the future. With this change, there is also an opportunity to shape the next stage in your career and how it supports your life goals. Talk about what you hope to achieve in your next job and how you will get there.
Layoffs are a harsh reality of our economy. I hope you never have to experience one. But if you do, I hope this information leaves you feeling emboldened to handle it with confidence and strength.
My name is Tim Melia, and I am a CERTIFIED FINANCIAL PLANNER™ Professional. I would be happy to answer any questions you may have or discuss how this topic impacts your life and financial goals. Feel free to email me at tim.melia@emboldenfp.com. If you would like to learn more about working with Embolden Financial Planning LLC, please schedule a free, virtual introductory meeting.
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References
"Can I Access Money in My 401(K) if I Am Unemployed?" Investopedia, 7 Dec. 2022, www.investopedia.com/articles/insights/073116/how-401k-withdrawals-work-when-youre-unemployed.asp.
