I Just Lost My Job: Part 1 – Navigating Your Finances
strateDon’t panic. You’re going to feel like crap for a couple days and that’s normal. Go ahead and take a few days, but don’t let it linger. Knowing where your resources are and how best to access them can go a long way in reducing your stress during this time. This is the first part of a two-part series (Navigating Your Finances and How to Land Your Next Gig)
Financial Reality Check
When you’re in shock from the loss of your job, it’s more because of the finances than it is that you really loved your employer. How are you going to be able to live with no income? Hopefully, you have some resources to support you during your transition period. If you’re like most people, you have resources but have no idea how best to utilize them to avoid taxes and penalties.
Checking & Savings– These assets are the easiest to access and are going to be most people’s’ first line of defense.
Non-Retirement Investment Account/(excluding annuities)– Most investments held over a year will have no penalty for withdrawal, but there may be capital gains that would be subject to capital gains tax. Long-term capital gains tax is preferred because it has its own fixed rates. Anything held one year or less is considered short-term and is included with your ordinary income.
Vested Stock Options– If you’ve been awarded stock options or restricted stock units (RSUs), it is important to know how your award is impacted by your termination. Were your unvested shares accelerated as a result of your termination? When do your vested shares expire? Even if your shares vest faster, your expiration dates may be shorter after you are no longer employed.
You typically can’t access funds within your retirement account prior to age 59.5 without a 10% penalty. There are a few unique exceptions and strategies, but wouldn’t apply to most people. I’m highlighting a few key elements of various retirement accounts that are helpful to keep in mind.
Roth IRA– One sweet feature of ROTH accounts is that you can withdraw your normal contributions into these accounts without penalty. You do want to avoid taking out the earnings portion of these types of accounts or incur a 10% penalty. There is also a 5-year rule on contributions made via conversion from IRAs to ROTH accounts that you must wait before removing these types of contributions.
IRA– In addition to the 10% penalty, your withdrawal amount is included as taxable income.
401(k)– Unfortunately, after termination, you are no longer allowed to use 401(k) loans, but if you have a spouse that is still employed, their 401(k) may offer a loan option, which avoids penalty and taxation if you follow the rules of the loan program. Anyone age 55 or older after termination is allowed to make one time withdrawals from their 401(k) and avoid the penalty, though this would be considered taxable income for taxes. You can find additional details in my strategy guide What to Do with Your Old Employers’ Retirement Accounts.
Debt/Credit– The last line of defense resources may include increasing your debt levels. One of the more reasonable debts to utilize would be a home equity line of credit because interest rates are very low. In some cases, it may be better to utilize Home Equity rather than incur fees and taxes on the accounts mentioned above.
Timing the recognition of capital gains in non-retirement accounts and taxable withdrawals from retirement accounts may be an important way to reduce your taxable situation. You’ll also want to review your investments to determine which investments would be beneficial to sell first. I recommend you contact your financial planner or CPA to come up with a strategy on how best to utilize these types of resources.
Your burn rate is how quickly you will begin to deplete your assets. The best way to estimate this is to build a budget. Review your previous months’ expenses and build out what you expect to spend in the coming months.
Monthly Income – Monthly Expenses = Monthly Burn Rate
This will paint a rough estimate of how much time you have to find your next employment.
(Resources- Taxes & Fees) Monthly Burn Rate= Months Until Resources Are Depleted
Just because you used to spend for example $5,000 a month, doesn’t mean you have to continue spending $5,000 a month. Having a budget may allow you to catch some loose spending habits and reel them in. This will alleviate some of the stress on your resources, buy you more time, and when you are gainfully employed again, you’ll be able to save more because of your new disciplined budget.
Knowing your financial situation should help provide perspective on how urgent your situation is. It’s also important to keep in mind that although you have resources to help ride out unemployment, you are impacting your future ability to achieve your long-term goals, which may require you to step up your savings game once you’re back on your feet.
If you’re having trouble with how to find your next gig, feel free to reach out or catch my next blog when it posts next week.
Do You Qualify For Unemployment– https://www.thebalance.com/do-i-qualify-for-unemployment-2064147
Should I File For Social Security– https://www.ssa.gov/pubs/EN-05-10147.pdf