Out of Work?
While you may worry more about losing your job when the economy is in a slump, people can be laid off any time. When companies merge or are acquired, the work force may be downsized. Or business may just be slow.
If that happens to you, do you know how you'd manage financially? It's smart to think about the bills that would have to be paid and whether you have an emergency fund that could help see you through several months of job searching.
If you're participating in a retirement savings plan, you'll be asked how you want your plan assets handled. You own the current value of your account that comes from your contributions and any earnings on those contributions. Your employer's vesting schedule determines if you own the contributions your employer has made to your plan.
You may be able to leave the assets in the plan, at least for the time being, and you always have the right to move them into an IRA.
The alternative that may make the least sense is taking a distribution in cash rather than rolling over to an IRA. You'll owe income tax plus a potential 10% of the total if you're younger than 59½ and don't qualify for an early withdrawal. And, if you spend the money, your retirement savings will be gone.
If you're laid off, you may be eligible to collect unemployment insurance.You apply at the local office of your state's unemployment agency. Rules vary from state to state, as does the income you're eligible for. Your benefit, which is taxable income, lasts until either you find a new job or the insurance expires. The term is usually 26 weeks, though it may be extended in times of large-scale unemployment.
Unless you have an employment contract, your employer isn't required to pay severance, or termination pay, though some employers do. You may want to check with your human resources department about company policy if your supervisor doesn't raise the issue.
One complicating factor is that there's no uniform standard for what severance should be. Some companies offer one week of pay for each year of service. Others provide a flat four weeks of pay, though some offer more in certain circumstances. Similarly, there's no requirement that all employees be treated equivalently. So you may want to be prepared to negotiate what you think is a fair settlement. It will probably pay to do some research online. One source is state unemployment agency websites that offer severance calculators.
When you accept a severance package, many employers require that you sign a legal document releasing the employer from any claims you may have. You should fully understand the implications of signing the release, so you may want to review it with your legal advisor.
Early retirement may be less traumatic than being laid off, but it will require some immediate decisions. If you're part of a pension plan, you may have to choose how your retirement income will be paid. If you don't need the money, you may ask to postpone income until you reach regular retirement age. That's not always an alternative, though.
If you participate in a 401(k) or other retirement savings plan, you'll want to investigate whether to start taking income or roll over your account balance into an IRA. It's wise to discuss the alternatives with your employer's human resources officer and ask your financial advisor to recommend a retirement specialist.
You also need to investigate health insurance coverage. Your employer may provide benefits until you're eligible for Medicare, or you may be eligible for continuing coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) under the same terms as people who have been laid off. The one thing you don't want to do is let coverage lapse.
The good news is that retiring doesn't have to be the end of your working life unless you want it to be. Unless you're a state employee who wants to work for another agency covered by the same retirement plan, there are usually no restrictions against earning a salary while you are drawing a pension. A new job may also be the solution to the health insurance dilemma—and it may be the perfect opportunity to try a new career.
It's essential to ensure that you have health insurance for yourself and your dependents. If you've been insured through your employer's plan, you may be eligible for COBRA for up to 18 months. It's not cheap. You pay the full premium your employer pays, plus up to 2% in administrative fees. But some states may require more generous coverage.
If you're married or in a long-term relationship, your spouse or partner may be able to cover you. Most employers offer family plans and some provide coverage for domestic partners. In all likelihood, this will be the least costly option.
You may also want to request:
- Use of your office space, computer, and phone line for a period of time while you search for another job
- Extension of your health-insurance benefits for as long as possible
- Prorated bonus for the months you've worked
- A faster vesting period for stock options so you can exercise them
- Cash for any unused vacation and sick days
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