News headlines everywhere are talking about widespread layoffs, particularly in the technology industry. Thousands of people have lost their jobs with still many more losses predicted in Q1 of 2023. With so many heavy hitters right here in the Pacific Northwest—Microsoft, Google, and Amazon, just to name a few—it’s likely these tech world layoffs affect you or someone you know. Many of our own clients have expressed concern over their own job security, understandably anxious and full of questions.
Of course, the primary concern when facing a layoff is finding a new job, but that can take time. Here are a few things to think about as you adjust to your new normal. Perhaps most importantly, DON’T PANIC!
Here are the things that should be first on your list:
- Give us a call! Your Wealth Advisor is here to help put your financial picture into perspective and to assist with planning to protect your investments. We can help you wade through the pros and cons of everything in this article—decisions regarding your 401(k), insurance, benefits, cash flow, taxes, retirement concerns, and more.
- Start networking! Reach out to alumni groups, job boards, professional organizations, former colleagues, recruiters, etc.
- Understand your rights under state law.
- Review company documents and your severance agreement. There may be some terms of the layoff you can negotiate, like extending healthcare or retaining some company perks.
- Apply for unemployment benefits.
- Once you know the details of your severance agreement and unemployment benefits, plan out how to fill the income gap. See below for the pros and cons with some of the different options available.
- Look at your options for any vested and unvested stock options or RSUs.
- Review healthcare options. Should you sign up for Cobra, get coverage via a Marketplace plan, or join your spouse’s coverage? A layoff is a triggering event, so these options are all available to you, but there are pros and cons to each that depend on your situation.
- Review your expenses and cut back if needed.
- Consider your 401(k) options.
What are your options for filling the income gap?
Spending down your assets – Sarah Kordon, CFP®, CRPS®, Wealth Advisor
Ideally, you have an emergency savings account specifically appointed for a situation like this. If so, this should be the first asset you begin to use to supplement your income. Keep in mind that you will want to rebuild your emergency savings account after you are settled in a new job, so don’t spend frivolously. Revisit your monthly budget and look for ways to cut costs so you can stretch these savings for a longer period and rebuild them quickly when your new income stream picks up.
Spending down assets may also affect your larger financial goals, so before you dip into your savings and investments too heavily, be sure to consider the ramifications. Hopefully shorter-term goals, such as buying a new home or taking a grand vacation, can simply be postponed. Longer-term goals, such as retirement at a certain age, can also be adjusted if needed, but hopefully your emergency cushion is large enough to keep that from being necessary.
If you need to take distributions from investments, we can help you evaluate the tax consequences and understand the impact of such actions on your goals, which may make some tough decisions a little easier and provide you peace of mind.
Taking a 401(k) loan or withdrawal – Sierra Butler, CFP®, CSRIC™
When you’ve stopped getting a paycheck, using some of your 401(k) assets through a loan or withdrawal might seem like an attractive choice, but here are some reasons why it should be your last resort.
Most 401(k) plans do not allow new loans after an employee has left the company. If you already have a 401(k) loan, the plan may demand an immediate repayment or a shorter repayment plan. The loan must be repaid before rolling over the balance into a new 401(k) or IRA, which would prevent you from consolidating your accounts and potentially taking advantage of superior investments in a different account.
If you instead take a withdrawal from your 401(k), or if the loan is not repaid, it will be treated as a taxable withdrawal and is subject to ordinary income tax. Additionally, you will incur an early withdrawal penalty of 10% if you are younger than age 55.
One of the biggest risks of a 401(k) loan or withdrawal is missing out on market gains should the investments do well after you take the withdrawal. I caution folks from viewing their retirement accounts as piggy banks for current spending as it can be a quick way to deplete their retirement nest egg.
Should I take on gig or contract work? – Frank McLaughlin, CFP®, CSRIC™
This question depends entirely on your financial situation and tradeoff preferences. Assess these by asking yourself questions like:
- Have I saved up enough cash to weather this period between jobs?
- Am I able to cut back on certain expenses to allow me to search for a new job without taking on a gig? Is cutting back on expenses worth it, or do I prioritize maintaining a certain lifestyle?
Note: Don’t forget to consider new potential expenses, such as healthcare costs.
- Do I have another source of income, such as a working spouse who could temporarily pick up the additional burden for a while? Would my significant other be okay with that arrangement?
If you find yourself answering no to more than one of the assessment questions above, taking on a side gig or contract work may be a great option to explore.
Could there be a silver lining?
Consider retiring early, staying home with the kids, or taking a sabbatical – Lowell Parker, CFP®
After a layoff, the most common course of action is to work toward finding a new job. But that isn’t the only path available to you. Burnout is real! Maybe this is your sign to take a break if you can afford to. Can you take this opportunity to retire early or stay home with the kids for a few years? Or perhaps take advantage of the temporary break from work and go on that long trip you’ve been dreaming about, or use the time off to work on a home remodel?
The obvious and large warning for any of these options is that your financial plan must support it. Do you know what these choices would mean for your future lifestyle? This is a major decision to make, and there are many factors to consider. What retirement lifestyle are you dreaming of? Are the assets you have saved enough if you won’t continue to have an income stream from a job? It’s important to revisit your financial plan and make sure you have saved enough to make work optional, whether temporarily or permanently, throughout a variety of potential future market scenarios. If this is something you’re considering, reach out to your Wealth Advisor to see if you can make it happen.
Make it work to your advantage at tax time – Chris Waclawik, AFC®, CFP®
After you’ve reviewed your income sources following a layoff and you have an estimate of the tax impact of using these sources for income, you may be able to create a plan to take advantage of the situation.
The “good” news is that a layoff, especially one that happens early in the year, can potentially place you in a lower tax bracket for the year, which opens up some planning opportunities. Here are a few to consider:
First, your health insurance choice may come with tax perks. When being laid off, many employees have the choice of COBRA, to extend current health insurance, or health insurance through the Marketplace. Purchasing coverage through the Marketplace can have subsidies (provided through your tax return) that can reduce the cost of coverage by over $1,000 per month depending on age, income, and the number of family members to cover.
Second, it may be possible to realize long-term capital gains at a 0% rate. This is a great opportunity to diversify out of a concentrated position without incurring a huge tax burden.
Third, finding yourself temporarily in a lower tax bracket can be a good opportunity for Roth conversions. By intentionally moving some investments from an IRA to a Roth account, you may be able to reduce taxes over your lifetime.
While I think everyone agrees layoffs aren’t fun to experience, at least we may be able to take advantage of them to reduce our tax burden for that year and potentially well into the future.
If you are experiencing a layoff yourself, remember: Your first step should be to contact your Wealth Advisor. If you’re not already working with one, schedule a meeting today. We can take some of the stress of these decisions off your plate and help you find the silver lining.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.
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