Laid Off Before You're Ready To Retire?
- March 3, 2020
Follow this 10 step checklist
One of the new challenges facing workers in their 50s and 60s is getting laid off before they are ready to retire. A study conducted in December 2018 by researchers at ProPublica and the Urban Institute found that more than 50% of workers “experience an employer-related involuntary job separation after age 50.” The workers laid off later in life had an extended period out of the work force and, if they were able to find a new job, it was at a much lower income. The research also found that only 16% of the people in the study were still working at age 65.
Some may attribute this phenomenon to the prevalence of ageism in our society. Others may contend that it’s just a practical business decision for companies to save money or attract new talent. Regardless of the rationale, the repercussions for folks who are being let go from a job late in their career can be disastrous financially. Most investors plan to contribute meaningfully to their savings as they simultaneously hit their peak earning years and no longer have the expenses that come with raising children. Dipping into one’s savings five to ten years earlier than planned, instead of continuing to save and invest, can lead to very challenging years ahead.
The best approach for this type of undoubtedly frustrating situation is to be proactive. Procrastination can further exacerbate the negative impact on one’s finances for years to come. Below is a list of planning items to consider after one is laid off late in a career:
When dealing with the shock of being laid off from a long-time employer, one of the first things to consider is filing for unemployment insurance once eligible. This may be overlooked by higher earners where unemployment checks may be quite modest compared to previous earnings. However, it will serve as an income stream to help with some basic expenses so there is no reason not to claim the money to which you are entitled. When dealing with the shock of being laid off from a long-time employer, one of the first things to consider is filing for unemployment insurance once eligible. This may be overlooked by higher earners where unemployment checks may be quite modest compared to previous earnings. However, it will serve as an income stream to help with some basic expenses so there is no reason not to claim the money to which you are entitled.
If you were a prudent budgeter throughout your career, you probably have a six-month emergency fund for situations like this. That’s great, but another precautionary measure is to reassess your expenses. There are certain expenses, like mortgage payments, rent, utility bills, and groceries, that can’t be reduced. However, canceling your next vacation, refraining from dining out, and postponing the kitchen renovation are all actions that can be taken until your financial future is more certain.
This is a good time to take stock of what you have saved up. Set a time to meet with your financial advisor to understand expected income from your current level of assets should you need to enter the decumulation stage of your financial life today. Looking at cash flow projections, reassessing asset allocation, and determining if you need to make lifestyle changes are all important decisions to make in the event that you are not able to get back to the same income level.
The earliest age to start receiving Social Security retirement benefits is 62. At that age you can collect 75% of the monthly benefits. For folks born in 1960 or later, age 67 is when you can collect 100% of your benefits. If you have a severance, emergency fund, or some other income sources, then waiting until full retirement age to claim benefits could be the best plan. However, if that is not a viable option, claiming now with a reduced benefit can be helpful from a cash flow perspective.
It’s important to note that while you are allowed to collect Social Security and unemployment benefits simultaneously, depending on where you live, your unemployment benefits might be reduced. If you have income coming from outside sources, it’s important to do your due diligence before claiming Social Security.
After lost income, one of the biggest concerns for workers that lose their job is the loss of their health insurance. If you are already 65, you can enroll in Medicare. If you are younger than 65, paying for COBRA can allow you to retain your old health plan. However, individuals may be required to pay the entire premium for coverage, up to 102% of the cost to the plan. Alternatively, buying a new plan on the open market is also an option.
Be mindful that a Health Savings Account (HSA) is owned by you, not your employer. Therefore, you can continue to use it for qualified expenses even after getting laid off. This will be helpful for any medical expenses that arise while between jobs.
Being out of work and having a lower income may actually present excellent tax planning opportunities for investors. Some strategies to consider, after consulting your tax advisors, include converting a Traditional IRA to a Roth IRA, exercising stocks options, maximizing IRA distributions, and selling appreciated stock. Each one of these decisions requires careful consideration of other aspects of your financial life, but being aware of potential opportunities, instead of just focusing on the obvious negatives, can lead to meaningful tax savings.
Immediately applying for new jobs is an obvious decision. However, repositioning your skillset is not always top of mind. One of the reasons older employees may lose their jobs is due to an antiquated skillset. That being said, after spending several decades in a particular field, you are bound to pick up many things that the 25 year old rookie who just replaced you does not yet possess. This includes experience, contacts, industry knowledge, secrets of the trade, and more. Leveraging these insights can lead to a career in a different job function within the same field.
Again, knowledge amassed during years of experience in your field can serve as a valuable resource to many. One of the smartest moves I have seen from laid off executives was setting up their own consulting firm. In doing so, they stayed active in their field, prevented gaps in their resume, maintained an income stream (even if choppy), and continued to network with like-minded professionals. While the transition from a high earning C-suite employee to an entrepreneurial consultant may be difficult, the benefits sure beat spending years unsuccessfully searching for work.
Changing careers may be a good opportunity to continue earning an income while reducing stress and improving your lifestyle. For example, if you worked as a corporate attorney at a large law firm, then switching to a not for profit organization will surely lower your income. You may need to work longer to reach your financial goals. However, you’d also be trading regularly spending 70+ hours a week in the office for a significantly improved work-life balance. This strategy may have been unthinkable at your old job, but the ability to think outside the box is essential in not derailing your financial goals.
While losing your job later in life is difficult, it can also serve as a wakeup call to get your finances in order before entering your official retirement. Getting a handle on your budget, organizing your finances, and evaluating your insurance coverages are all excellent ways to prepare for life after work. Furthermore, adjustments to your lifestyle by working as a consultant or in a different career can be great for mental health as you enter retirement. Although many people look forward to leaving the workforce, choosing to continue working, gradually transitioning out of corporate America to a less stressful job, helps retirees keep active, have daily structure and stay mentally sharp, while also providing some additional income in order to delay living strictly off their savings.
As people continue to live longer, there is no doubt that the trend of leaving the workforce prematurely will continue. Having a strategy in place for that possibility is the best way to preserve your finances as well as the retirement you envisioned.
Associate Director - Investments
OMEGA Portfolio Management
This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice.