“Laid off” are probably two of the most frustrating words any employee can hear, especially after years of working hard and dedicating hours to an employer. But for millions of people, by no fault of their own, layoffs happen—and often, with no notice.
After spending a couple of days processing the news, alerting your loved ones, and sleeping in a little later than usual, there’ll come a time when you’re ready to face the big question: What’s next?
While every industry and local job market is different, people spend around 24 weeks on average unemployed between jobs, according to the Bureau of Labor Statistics.1 If you find yourself with extra time on your hands while applying and interviewing for your next role, try searching for a silver lining in the layoff. Without the demands of a full-time career, you may just discover the freedom to level up your skillset, test out your retirement budget, and otherwise use your time discerningly.
Here are five tips for protecting your finances during a layoff and spending your time wisely between jobs.
#1. Review your severance package and other assets
During a layoff, your employer may offer you severance pay, either as a lump sum or a series of payments, which is meant to help you bridge the gap until you find your next job.
Think of your severance package as an extension of your income or another valuable asset—as opposed to a “bonus” or windfall. Review your current spending habits and financial obligations (like your mortgage, loan payments, utilities, etc.) against your available resources. These might include that severance package, your emergency savings, a payout for unused vacation days, and other easily accessible funds that don’t disrupt your long-term savings.
Comparing what you’ll expect to spend each month against what you have available can give you a better idea of how long you can comfortably cover your expenses before dipping into other resources or accruing additional debt.
You might also have access to important tax-advantaged accounts such as a 401(k), IRA, or HSA. While it can be tempting to withdraw funds during a period of unemployment, early distributions may result in hefty tax penalties. Not to mention, anything you draw down from your retirement savings now impacts your future retirement income. If at all possible, try to keep retirement accounts intact unless there’s truly no better option.
That being said, if you’re between 55 and 59.5, you may qualify for a penalty exception. Withdrawals from a 401(k) linked to the job you just lost can sometimes avoid the 10% penalty if you’re 55 or older when taking them.2 Check with your plan administrator and financial advisor before withdrawing to be sure you qualify for penalty-free withdrawals. Keep in mind, you’ll still owe ordinary income tax on any withdrawals from your 401(k), even if penalties are waived.
Is it better to take severance in a lump-sum or monthly installments?
If you’re still in the process of negotiating your severance package, you may be able to choose between a lump-sum payout or monthly payments. In either case, what you receive in your severance package is typically taxed as ordinary income.
How and when you receive that money, however, has the potential to affect both your taxes and unemployment eligibility.
If you take your severance as a lump sum, the full amount is counted as income in the year you receive it. But let’s say your layoff happens in November or December, and your employer gives you the option to take monthly payments instead. Rather than receive, for example, three months' pay as one lump sum at the end of the year, spreading the payout across several months (and into the new tax year) could help keep your tax burden in check.
Though, this is assuming you’re able to cover your financial obligations and expenses with the monthly installments and other available resources (like your emergency fund). Make sure you’re covering your financial needs—and avoiding debt or drawing down retirement resources early—before focusing on the potential tax implications.
Regarding unemployment, some states treat severance pay like continued income, meaning you can’t collect unemployment until the severance period ends. If you receive your severance all at once instead of spread out, you may be able to apply for unemployment sooner once that lump-sum “income” period has passed.
If you’re offered additional benefits like continued health insurance coverage, job-placement services, or an accelerated vesting schedule for company stock, weigh those benefits carefully before signing any paperwork as well.
#2. Think about how to leverage a drop in income
With a job loss, your income for the year is likely to change. If you have some well-funded emergency savings, you may be able to take advantage of some fairly unique tax-planning opportunities here.
If you expect to fall into a lower tax bracket than usual this year, you might consider moving some of your existing IRA to a Roth IRA through a Roth conversion. While you’ll owe taxes on the converted amount this year, a Roth conversion can help create tax-free income for retirement.
Another option is to review your taxable investment accounts. If you need to sell investments to cover living expenses, doing so during a lower-income year may reduce the tax impact of realizing capital gains, particularly on investments held for less than a year. You can also “harvest losses” by selling investments that have declined in value to offset gains elsewhere in your portfolio.
Even if you’re not ready to make big moves, it’s worth estimating your income for the year after experiencing a layoff. Having a lower income may open doors to certain benefits, such as premium subsidies for health insurance through the state marketplaces.
#3. Stress test your retirement
In many ways, a layoff late in your career can serve almost as a “trial run” for retirement. Before you’re ready for the real deal, use your insights during this time to better determine if your retirement plan is as well-aligned with your goals and needs as you hope.
Without your usual paycheck, you’ll need to draw from other resources to fund your everyday expenses. While you might not have access yet to important retirement resources like Social Security, pension plans, or your retirement accounts, think about whether your retirement budget truly reflects your anticipated lifestyle and priorities. Use this time to decide which expenses are non-negotiable and what could be trimmed if needed.
To do this, track your spending closely. Consider what a typical day or week looks like when you’re not working. You may find that some costs, like commuting or dining out, naturally decline, while others, such as travel or hobbies, rise.
#4. Address the missing pieces (including health insurance)
If you’re eligible, apply for unemployment. While this won’t replace your paycheck completely, it will offer a percentage of your previous wages, depending on your state’s guidelines.
You may lose access to other important benefits as well, including health insurance.
Once you lose existing health coverage, you’ll qualify for a special enrollment period, which allows you to make changes to your health insurance coverage for a period of 60 days. If you’re able to join a spouse’s workplace plan, this is generally the most cost-effective option. You can also extend your existing coverage through COBRA, though premiums will be higher since your employer isn’t subsidizing a portion of them.
Otherwise, you may need to find a plan through your state’s insurance marketplace, at least until you join a new employer’s plan (or qualify for Medicare, if you’re nearing 65).
#5. Grow your skillset
As you start applying for jobs, you may notice a pattern regarding what skillsets, certifications, or specific knowledge hiring managers want to see from applicants. Review your resume, and consider whether you’re already checking all the boxes—or if there could be room for improvement.
If you’d like to use this career break to change course altogether, consider what in-demand skills could be added to your repertoire. It may come as no surprise, for example, that there’s been a considerable increase in small business demand for skills involving artificial intelligence, data analysis, and machine learning.3
Look for credible online courses, especially ones offered by industry-recognized organizations, educational institutions, or governing agencies.
Make the most of a difficult time
A late-career layoff is never fun, but there are ways to turn this setback into an opportunity. Check in with your finances, and reassess your spending, saving, and retirement readiness. Take some time to figure out what matters most to you, both from a financial and personal standpoint.
If you find yourself with some extra time between jobs, don’t shy away from increasing your skillset, pursuing a hobby that’s sat too long on the back burner, and putting some extra thought into your eventual retirement. With some careful planning and the help of a financial professional, you may find ways to turn this layoff into some important financial opportunities or lessons.
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