By Oscar Casas, CFP®, CRPC®, MPAS®, ABFP℠
Experiencing an executive layoff can be an overwhelming and unexpected life event. While it’s natural to feel uncertain, taking a proactive approach to your finances can help you regain stability and set a strong foundation for the future.
This article is here to provide practical insights to help you navigate this challenging time with clarity and confidence. Together, we’ll explore essential money management strategies to help you move forward with resilience.
Optimize Your Severance Package
Optimizing your severance package is critical after an executive layoff. Review the severance agreement carefully, taking note of important terms and conditions like the duration, eligibility requirements, severance pay amount, and any limitations, like non-compete clauses.
While severance packages often appear set in stone, negotiation is many times on the table. Consider discussing ways to make the offer better, such as extending the severance term, raising the severance pay amount, or obtaining extra benefits like ongoing health insurance coverage beyond the initial offer.
Seize any and all career opportunities offered in your severance package. Options like career counseling, outplacement services, executive search support, and resume-writing assistance might seem trivial at the time but can prove extremely helpful. These resources can help you effectively navigate your next career move.
Also, leverage any continuation of health insurance that may be available to you through programs like COBRA or the extended coverage provided by your previous employer. This provides continuous healthcare while you look for a new position.
Consider Moving Funds Out of Your Former Employer’s 401(k)
After a layoff, it’s worth thinking about what to do with your 401(k) from your previous employer. Moving it into your new company’s plan or an individual retirement account (IRA) could give you more flexibility and control. Here are a few reasons why this might make sense:
- More Withdrawal Options: Some company plans limit how often you can take distributions or make it tricky to set up regular withdrawals. Moving your savings could potentially give you better access to your money when you need it most.
- Better Investment Choices: Rolling over your 401(k) allows you to explore investment options that might not have been available before. A limited selection in some plans can make diversification and rebalancing challenging. By consolidating your accounts, you may find it easier to align your investments with your broader financial goals.
- Simpler Management: Keeping all your retirement savings in one place can make tracking and managing your accounts much easier. Plus, an IRA gives you added benefits like the option for qualified charitable distributions (QCDs) that aren’t allowed in 401(k) plans.
- Streamlined Beneficiary Rules: Inherited 401(k)s can come with complicated rules for non-spouse beneficiaries. In some cases, beneficiaries might face strict timelines for withdrawing the money, which could lead to hefty taxes. An IRA often provides more flexibility, giving your loved one’s better options.
Taking time to review your options can help you find the best place for your hard-earned savings while keeping your retirement plans on track. A financial advisor can guide you through this decision and help you make the most of your opportunities.
Understand Net Unrealized Appreciation (NUA)
If your 401(k) includes company stock, it’s worth learning about a lesser-known strategy called net unrealized appreciation (NUA). This approach can help you make the most of the increase in your company stock’s value beyond what you originally paid for it.
The IRS allows you to move your company stock out of a retirement plan and potentially pay lower capital gains taxes on the stock’s growth, rather than the higher regular income tax rates. To take full advantage of this opportunity, it’s important to check the stock’s original cost (known as the cost basis) after a layoff.
Before making any decisions about what to do with company stock in your 401(k), consider speaking with a financial advisor. Liquidating or rolling over the entire plan might seem straightforward, but it’s an irreversible step that could cost you significant tax savings if NUA applies to your situation. A professional can help you determine if this strategy is right for you and guide you through the process.
Address Healthcare Needs Before Your Insurance Ends
Losing employer-sponsored health insurance after a layoff can feel overwhelming, but understanding your options can help you stay covered. Health insurance termination policies vary by company—some plans end the day of termination, while others extend coverage through the end of the month.
Start by clarifying your company’s policy so you can plan ahead. If your coverage continues until the end of the month, consider taking care of any health needs before the insurance lapses. This might include scheduling routine checkups, visiting specialists, or refilling prescriptions you’ll need in the near future.
Once you know when your current coverage ends, it’s time to explore your next steps. Here are a few options to consider:
- Retiree Medical Coverage: If you’ve earned retiree medical benefits through years of service, check with your current or former employer’s benefits provider to see what plans may be available.
- COBRA Coverage: You may be eligible to continue your employer-sponsored health insurance for up to 18 months under COBRA. While this keeps your current plan intact, you’ll need to cover the premiums yourself.
- Medicare Enrollment: If you’re 65 or older, you can enroll in Medicare during a special enrollment period (SEP) that lasts up to eight months after your layoff. This option is available even if you choose COBRA.
- Health Insurance Marketplace: For coverage through state or federal marketplaces, visit HealthCare.gov to compare options and apply. Most plans begin coverage on the first day of the month after enrollment.
Taking these steps now can help you avoid gaps in coverage and give you peace of mind as you navigate this transition.
Be Mindful of Your Cash Flow
Start by keeping a careful record of every source of income, including unemployment insurance, severance money, and any prospective revenue from freelancing or consulting. Meticulously track all your expenses, categorizing them as essentials (housing, utilities, groceries) and non-essentials (eating out, entertainment).
Examine these categories to pinpoint where you can cut costs. This could mean looking into more affordable alternatives, such as cutting back on eating out or finding less expensive entertainment options.
To bridge potential cash-flow gaps, investigate short-term financing choices like a home equity line of credit (HELOC) or a personal loan. But be sure to carefully weigh the associated costs of these short-term options.
Lastly, relying on a strong emergency fund is crucial for surviving unanticipated financial setbacks like an executive layoff. An emergency fund loaded with several months’ worth of living expenses provides a critical financial safety net in tough times.
Seek Professional Financial Guidance
Leveraging available options and maintaining a strong financial foundation for the future are paramount for effectively navigating an executive layoff. A professional financial advisor can provide personalized guidance and support during this difficult season.
As fee-based, independent fiduciaries, Tranquility Path Investment Advisors always prioritizes your needs and goals. We work to earn your trust and comfort with our strategies and gently guide you through the process, demonstrating genuine care for your situation.
To get in touch, schedule a no-obligation conversation or reach us at (732) 856-4324.
