People get fired every day. It happens year round. Some people get temporarily and permanently laid off. In more discrete corporate situations you may be asked to leave and given the opportunity to resign or retire in lieu of being fired. But in today’s economy it’s happening more and more frequently. It’s happening across the board, large companies, small companies, blue collar, and white caller. It is truly getting rough out there. The old adage of doing the best job you can and exceeding expectations is about the only thing you can do to try and create some job security. Beyond that, there isn’t much I can say that would help someone keep their job. What I can write about is what someone should do concerning their finances once they are no longer employed.
My first bit of advice would be to look for a job. Some people take a little time off to relax or catch up on something. But unless you are very close to retirement and can afford to go right into retirement now, you will have to get a job again. Ideally you have at least 6 months worth of living expenses put aside. The two main reasons that advisors suggest savings anywhere from six to twelve months worth of income are in case of short term disability or unemployment. You can live off your savings while you look for another job. So there is no need to hit the panic button yet. If your savings are not as robust as they should be, you still have options and can put together a game plan.
Your biggest asset will be whatever money you have in your employer sponsored retirement plan. Whether it be a 401k, 403b, SEP or Simple IRA they can all be useful. That money should be rolled over to an IRA when you leave your job. Then you can have control over where the money is moved to and what investments your money is allocated to. The IRA is a great place for rollover money. It gives you the ability to control the fees and investment options so much better than in an employer’s plan where you don’t have a say in what investments are available. This money can also be the seed money for you to start your own business. Now there are tax consequences and IRS penalty concerns but it may be the only place to get money. Banks have tightened up lending and this applies even more to a small start up business without a proven track record. This is why many people who are a little older and looking to start their own business as a second career often turn to a franchise. But even a franchise requires serious up front money and this is where your retirement plan money can come into play. A risky move for sure, but many people do it every year.
The second use for your retirement plan money can be to help pay bills if your job hunt does not prove fruitful. If you go through your savings and have taken on all the additional credit card debt you can handle then going to your investments may be a necessity. The reason I said about taking on some more credit card debt before going to your investments may seem odd, but follow me on this for a second. I don’t want you to max out the cards but perhaps take on a minimal to moderate amount more debt. Once you get a job again you can begin paying that debt down. But if you take a lot of money out of your retirement plan you will not be able to put it back in. The contributions you can make to your IRA every year will not be enough to pay back the money you took out. Not to mention whatever money you withdraw will be subject to taxes and in most cases an IRS penalty. This can reduce your money by 40% or more. Also, when you are spending it, that money is not invested and working for you. That is why I say if you have to, the money is there to take but don’t use it as your first resort.
Another consideration you may have is your health insurance benefits, or sudden lack thereof. If you are single or cannot pick up benefits through your spouse, this can be a very scary thing. The following does not apply to every state; however let me comment on PA, NJ, and NY as they are the three closest states to my office. In all three states you can take COBRA. This will extend your health care coverage and keep you in the same plan you had when you were working. COBRA may be very expensive to what you were used to paying. This is because COBRA is the health insurance you had with your employer but now you are paying the full price with no employer contribution to offset the cost. To recoup the administrative costs of filing paperwork and keeping you on the insurance plan your former company can also charge up to an extra 10% of your premium as their fee. So you may be on the hook for quite a bit of money. But hey, you will still have health insurance.
In the state of PA, you can also go get your own health insurance for you and your family. PA has underwriting on insurance policies in the state. So your premium will vary depending on the plan selected and general health of those covered under the plan. You can get a short term major medical plan. This will cover any major problems that come up. Your prescription and routine doctor visits will not be covered, but anything major will be covered. Your premium will be considerably less than a full plan, but there will be more out of pocket costs if you need something routine. The limitation of this type of coverage is that you can only carry it for a year, and then you must switch to some other type of plan. In NJ and NY there is no underwriting on individual health insurance plans. This means to you that whether you are healthy or sick, the insurance companies will have to accept you and everyone of the same age and sex with the same plan will pay the same premium. This makes your premiums higher than in most other states, so the healthy people help to offset the cost of the not as healthy people. That may seem like a bad deal if you are healthy, but the coverage is guaranteed and you have a set price. Shopping between companies for the best deal is easier for you or your agent and you know exactly what you are getting.
The last point to take away from this about health insurance is that COBRA is not guaranteed to be offered. If your former employer files bankruptcy under chapter 7, they will go completely under and not have a health insurance plan in place. In this case, there is no health insurance plan in place for you to retain coverage under. This is about the only situation under which you would not be able to get COBRA and retain your old coverage if you desire. The other coverage that you will lose is your disability insurance. If you have no job and are not earning an income there is no income to protect and replace if you get hurt. In these cases you will be able to either get disability insurance with your next employer or if they don’t offer it, pick up the insurance on your own. One side note about disability insurance is that if you have it, you should review your coverage. Most employees do not know how much coverage they have and many do not have enough to cover their bills if they do become disabled. In the meantime, I hope you are gainfully employed for as long as you wish to work. If you do find yourself on the wrong end of a pink slip, I wish you Godspeed in finding another job. If losing your job does happen please contact a good advisor to help you with your health insurance coverage and your retirement plan rollover.
