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SMART INSIGHTS FROM PROFESSIONAL ADVISERS

Losing Your 6-Figure Job? Use These Financial Strategies to Come Out on Top

Executives navigating layoffs and buyouts have some critical decisions to make. Here's what they need to consider.

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A large number of Fortune 500 companies have recently announced layoffs — from Disney’s ESPN unit to PepsiCo to General Motors. Even educational institutions like The University of California-San Francisco are making cuts. Most of these are involuntary layoffs, meaning positions are cut and people are likely to lose their jobs. Voluntary layoffs, where employees can choose to take a buyout, have also been announced at other major employers, such as Boeing and Fidelity Investments.

SEE ALSO: Which Career Path Are You On? Your Retirement Strategy Depends On

Learning that your job has been eliminated is an incredibly stressful moment. On top of that news, many people need to make major decisions involving their money in a short period, such as whether to try to find another job at that company or take the severance package. These decisions can be overwhelming for the most seasoned executive.

Once a person has been informed that their job is gone, the first step is to take a deep breath and clear your head. It’s natural to be angry or feel resentment for a few days. But it’s important to focus on the future, read the details of your severance package and run the numbers.

I’ve worked with several corporate executives who have lost their high-paying jobs and to help ease the financial burden, I suggest the following three-step decision-making process.

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Step One: Determine the length of time that you will be able to pay your bills and maintain a healthy lifestyle.

I start by calculating the amount of money in the executive’s nest egg and the severance benefits they’ll walk away with. My analysis includes answering these questions:

  • After taxes, how long can the person live from the cash in their bank account plus their severance check?
  • How much savings is in their retirement accounts? What funds can be tapped without major tax consequences if money is needed in the next few years?
  • Do we need to restructure the executive’s financial portfolio to boost cash and other liquid assets?
  • What are the debt payments due and other fixed monthly expenses? Are there areas where spending can be reduced?

Step Two: Take a mid- to long-term view of your financial plan.

These questions include:

  • Is there enough money saved to retire today when the severance pay is included?
  • If not, how much must they earn in a new job? And how much longer do they need to work to meet their retirement goal?
  • What other financial obligations are still outstanding? Do they need to pay for a child’s college education or plan for long-term care needs?
  • Is moving to a new job in a different state likely? Laws governing income and estate taxes vary by state, so determine how your income will be affected and update your will.

Step Three: Make key time-sensitive financial decisions about leaving the company.

  • Severance strategy. A number of executives receive six-figure severance packages, so how should they spend, save and invest these funds? While this money may feel like a windfall, it’s a great opportunity to boost their progress toward retirement or college savings goals. Next, be sure there is enough money in the emergency fund; if a person needs to find another job, they should consider having at least 12 months of living expenses in cash.
  • Company stock. For many executives, stock options and restricted stock grants in their former company are their largest assets, so it’s important to develop a plan for how much stock to keep or cash in. A guideline I use is to have enough diversified assets outside of company stock so their core lifestyle can be funded for the rest of their lives without the risk of owning too much in one single stock. The taxes owed on any grants cashed in may be considerable, so speak with a tax adviser before making this decision.
  • 401(k) savings. These funds can be left with the executive’s former company, rolled into a new employer’s plan or an Individual Retirement Account (IRA). For anyone who leaves their company between the ages 55 and 59½, consider leaving part of your 401(k) plan intact if you think you may need to tap this money soon, because the IRS lets those departing workers make early withdrawals without subjecting them to the usual 10% penalty. And if there is after-tax money in your 401(k) plan, you may be able to roll over part of your 401(k) into a Roth IRA, which can provide income-tax free withdrawals during retirement
  • Pension. If your former employer still offers a traditional pension plan, whether you take a lump sum or a monthly annuity could be the most important decision you ever make regarding your retirement. Everyone has different needs, but most people who are married, in good health and between 55 and 65 choose the monthly annuity. Those with significant assets or other company pensions, are going back to work for several years, or have major health issues may want to roll the lump sum into an IRA, deferring the taxes.

See Also: Is the End of Jobs Coming? Employees Beware

Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm with $1.4 billion in assets under management, serving over 500 families in 30 states. She works with high net worth families in investment management, executive compensation, retirement transition and estate planning. Brown is a Certified Financial Planner™ and an Accredited Estate Planner.

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