What you do immediately after receiving word that you've lost your job can make a big difference in how you will be able to support yourself and your family. Making rushed or ill-informed decisions can have dire consequences over the long term.
Employees leaving their employers, either on their own terms or on the terms handed to them, can greatly benefit from tapping professional guidance to sort out the numerous options. A trusted advisor also can bring you up to speed on new developments, such as the temporary increase in unemployment benefits under the recently enacted federal stimulus bill.
The days and weeks following a job loss can be an emotional and surreal time with many questions.
1. UNDERSTAND YOUR SEVERANCE PACKAGE. You will likely get a package of information when you leave your employer that includes an explanation of what you will receive financially and your options to keep your insurance coverage. Where applicable, you will also receive a final accounting of deferred compensation, stock options, pension plans, company retirement accounts, severance pay (and terms for collecting) and unused vacation time.
Study these documents before signing anything and ask as many questions as necessary to fully understand them. Check your employee handbook to make sure your severance matched or exceeded the standard formula and that all your benefits were accounted for. Negotiating better terms may or may not be possible, but it's reasonable to ask for time to review all the documents before signing anything. Depending on your severance package and the reasons given for your layoff, you may want to consult with your tax advisor, attorney and/or a financial professional.
2. ASSESS YOUR FINANCES. Take stock of where you stand financially. Where will your income come from and what are your daily, short-term and long-term expenses? Redo your budget to reflect your new situation. Complete a cash flow analysis that will help you do everything from prioritizing expenditures to examining the full range of investments to assessing insurance needs.
3. APPLY FOR UNEMPLOYMENT BENEFITS. The Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers. Contact your state unemployment insurance agency as soon as possible after losing your job. It generally takes two to three weeks after you file your claim to receive your first check. Currently, benefit checks average about half your weekly pay, up to approximately $300 per week nationwide. Regular benefits extend for 26 weeks and are controlled on the state level within federal guidelines.
4. DETERMINE IF APPLYING FOR SOCIAL SECURITY BENEFITS MAKES SENSE FOR YOU. Social Security may provide a regular source of income starting at age 62. However, beginning these payments early will mean that your monthly check is permanently lower than if you waited until your normal retirement age (age 65 to 67, depending on year of birth). Also, if you collect Social Security payments before your normal retirement age and begin to work again, benefits could be reduced further and subject to taxes, depending on your adjusted gross income. Typically, it would pay to begin early collection of Social Security benefits only if you have no other sources of adequate income or if you anticipate a shorter-than-average life expectancy due to poor health.
5. PULL TOGETHER YOUR INVESTMENT STATEMENTS AND RETHINK YOUR PORTFOLIO. Today's economic environment may have changed the makeup of your investment portfolio so that it's out of balance or no longer matches your current needs. Determine how your investments might provide much-needed current income, while still remaining positioned to work toward achieving your long-term goals.
6. GET ADVICE BEFORE YOU MAKE RETIREMENT PLAN DECISIONS. Today, most employers offer departing employees the choice of a lump-sum distribution from their retirement plans. This single payment represents years of hard work and carries with it the hope of a long-awaited, well-financed retirement. You may be tempted to use your retirement plan assets as a source of current income during your period of unemployment. This move could cause dire consequences to your long-term security, especially when you consider that most of the funds distributed directly to you will be subject to taxes and could incur a penalty.
Of the various options you have for receiving your retirement plan assets, first consider rolling your former employer's funds into an IRA. By doing so, your funds remain tax-deferred and are positioned for future growth potential. If your future employer accepts rollovers into the company retirement plan, this option would still remain open for you to exercise in the future.
7. KEEP UP YOUR INSURANCE COVERAGE. If you were covered by your employer's insurance plans, most likely it will now be up to you to pick up coverage for yourself and your family. You will have to act quickly to prevent a lapse in coverage. Keep this information in mind as you assess your situation: (a) You may be able to convert your former employer's group life insurance or disability policy to individual coverage and pay the premiums yourself. (b) If your company employs more than 20 people, you have the right, under a government law known as COBRA, to continue employer group health coverage. (c) Switching to your spouse's plan may be your most economical choice. (d) Explore private-coverage options through fraternal or industry organizations.
• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creekbaum@mssb.com or 689-8704.