Every month and every year, companies reorganize, merge, or opt to hire contractors where they once staffed entire full-time teams. Now, the average adult can expect to work 4.6 years at a new job and “job hopping” is no longer frowned-upon in an entrepreneurial economy.
But what happens when you’re laid off?
A layoff, financial advisors say, is a key test of a consumer’s financial management skills and a time when many investors may make financial mistakes due to fear, shame, or being overwhelmed. Fortunately, those with a well-thought out financial plan can take comfort in the fact that these plans almost always offers resources they can tap to help manage money through changing times. Here’s a look at how to make it through the bumps in the road.
Before a layoff: Stock away savings, consider a HELOC
For workers concerned about the potential for layoffs at their company or negative dynamics in their industry, it’s obvious that buffing up a LinkedIn profile, networking with peers at industry functions, and sending a resume to recruiters are wise moves. They can help with a swift rehire (and swift resumption or transition of household income) in the event of a job loss.
Financially speaking, there are several steps investors can also take to make sure they’re adequately prepared for job transitions. First off, investors will need to make sure they’ve got adequate savings to weather a job loss. Advisors vary on how much savings cushion an adult should maintain.
Erik Olson, an advisor at Arete Wealth Management in Crystal Lake, Illinois, says his advice varies by the adult’s life stage and what role they play contributing to a household income. For a person who is an entrepreneur and/or the sole breadwinner for a family, he suggests a 12-month cash cushion. For a primary breadwinner with a steady full-time job, he recommends a 6-month cash cushion. And for an adult in a two-earner household where partners make a similar amount from full-time employment, that amount could be a 3-month cash cushion.
Another option for workers suspecting future layoffs is to tap home equity. Home equity lines of credit (HELOC) typically come with interest rates lower than other kinds of credit, and these rates are generally lower than the penalty rate on early withdrawals or loans from retirement accounts. Just because the line is available doesn’t mean the consumer has to draw funds from it. As with an unused credit card on your wallet, you don’t pay interest on it until you begin using the credit line. The catch: To qualify for a HELOC at favorable rates, you’d want to apply for it while still employed.
“I’m not a super-fan of tapping a HELOC for living expenses, but there’s an argument to have a line on hand for emergencies for some investors,” Olson says.
After a layoff: Trim the budget, pick up projects, stay proactive
Many adults who are laid-off receive severance as a cushion to help support them through unemployment. However, Olson cautions that severance sometimes offers false comfort to workers about how long they have to land a new job. Rather than take a long pause or go into hibernation, the newly unemployed need to be proactive, social, and networking to locate their next opportunities.
It may sound obvious, but anyone facing a layoff also needs to review and pare their budget, Olson notes. For some higher net worth individuals this might mean downgrading their country club membership or editing the vacation calendar. For the middle income worker, this might mean trading a $60 monthly cable bill for a low-cost movie streaming service, dining out less, or going to a cheaper gym.
“I recommend that people try to trim $1000 a month out of their budget,” he says. “You’d be surprised at how easy this is once you take a hard look.”
Younger adults who are just starting out may be able to halt student loan payments temporarily. Many also pick up temp or shift work through contracting companies or in retail and service businesses. They may also be able to take on roommates, rent a spare room on Airbnb, and come up with other sharing-economy income steams. However, this isn’t just for young adults. For many people, spending some time drumming up alternative income may be smarter than quietly going broke while holding out for the right job.
“The more income you have, even if it’s not directly related to your ultimate career goals, the longer you can last through the job hunt,” he notes.
Tapping saved assets: Consider tax ramifications
For those facing a layoff, and worried about funding what could be a protracted job hunt, it’s important to check in with a financial advisor about the tax impacts of tapping different portfolio assets, cautions Olson. Tapping cash savings does not carry tax consequences, whereas selling stocks and funds from a brokerage account may carry capital gains taxes. Extracting such funds from a non-Roth retirement account (such as a 401k or SEP IRA) can trigger gains taxes, plus early withdrawal penalties (depending on age).
Additionally, depending on when in the calendar year a worker was laid off, taking a large withdrawal from a retirement account in order to convert it into available cash can bump some workers into a higher tax bracket, he adds.
“In some cases, if the worker needs to tap their retirement for cash, it can be beneficial if they can hold out past the New Year,” he says. “It’s important to look at all the options with a professional.”
Workers over 55 who have been laid off may be able to begin taking early withdrawals from retirement and sidestep the 10% penalties. Under a program known as “substantially equal periodic payments” (SEPP), if a worker satisfies a few different conditions and is willing to take the same monthly withdrawal until age 59.5, they may tap their retirement funds. Some workers initiate these withdrawals as a precaution while they hunt for new work or on the expectation that they’ll earn less income at a new job. However, those electing this withdrawal plan can always reinvest funds back into retirement or other market accounts if they find a new or more lucrative employment situation faster than expected.
Transitioning into new work: Finding freelance or contract projects
Many professionals find they pick up paying projects from a now-former employer or from other organizations in their field. In this way, they slowly become self-employed or small business operators within their former profession.
For some workers, this brings many benefits as they realize that a collection of projects and client relationships—often done remotely or from home—can deliver an income resembling past full-time work.
Rita Cheng, CEO of Blue Ocean Global Wealth in Rockville, Md., notes that one of her clients lost her communications job at a Washington DC area nonprofit when that organization lost the grant that funded the job role. The nonprofit valued the worker, though, and offered her part-time consulting work for close to $20,000 annually – or about 25% of her past income. With her past employer as an anchor client and reference, she was able to swiftly build up a corporate writing business focused on cause-related and nonprofit clients. This new arrangement worked well as the woman was planning to have children and wanted flexibility.
Ms. Cheng cautions that any formerly full-time worker who becomes a freelance or sole proprietor chat with their advisor about how this changes their money management. Without an employer’s benefits embedded in their new form of income, full-timers who segue to freelance typically need to bring home 20% to 30% more income than what they received in salary previously. This is because the self-employed must personally buy and arrange benefits previously automated and deducted from their paychecks. They must fund their own retirement and savings, pay their own taxes, and pay out of pocket for perks like gym memberships or commuter reimbursements. They may also need to bolster their savings reserves.
“A layoff doesn’t have to be the end of the world,” Ms. Cheng says. “It’s often a good opportunity, but you have to approach your decision-making carefully.”