As a CERTIFIED FINANCIAL PLANNER™ Professional, I have helped clients in the past navigate the stressful, sometimes financially challenging, times that come with the uncertainty of an unexpected job loss. With the layoff headlines seemingly increasing each week, I wanted to discuss steps you can possibly take to ensure your financial security. My goal is to cover what I believe are the important considerations for individuals who have been laid off and provide advice for employers who want to assist their former employees.
Retirement Plan Options
When employees leave their employer, they have several options for their retirement savings plan. The most common options include:
- Rolling the funds into an individual retirement account (IRA),
- Leaving the funds in the former employer's plan,
- Rolling the funds to a new employer plan, or
- Cashing out the plan
Each option has advantages and disadvantages and a plan participant may engage in a combination of these options. Thus, employees should carefully consider their financial goals and situation before acting on their options.
For example, if you are happy with the investment options available in your 401(k) and have the time, knowledge, and temperament to manage your investments, leaving the funds in the plan due to potentially lower fees could make sense. However, for someone who doesn’t fit this description, rolling over the 401(k) to an IRA can likely increase your investment options, help consolidate accounts, and provide professional management opportunities.
Health Insurance and COBRA
Losing a job also means losing access to employer-sponsored health insurance. Fortunately, employees under the age of 65 have plenty of options for health insurance, including COBRA, on-exchange health insurance, off-exchange health insurance, and Medicaid. COBRA allows employees to continue their employer-sponsored health insurance for a limited period, but it can be expensive, since you are taking on the full cost of the healthcare insurance.
On-exchange health insurance refers to obtaining insurance through the health insurance exchange in your state at HealthCare.gov, but it is essential to understand that it may have a higher monthly premium and deductible than employer-sponsored health insurance. However, you may be able to qualify for financial help with any out-of-pocket costs in the form of subsidies.
Off-exchange health insurance refers to buying a plan that is purchased directly from an insurance provider, through a broker. Coverage plans of this nature are likely similar in costs to an on-exchange plan, though a benefit of purchasing health insurance from an insurance provider is that you can have more first-hand expertise with the plans they offer. And additionally, the insurance broker can break down even more important details and differences in their offerings, tailoring your plan to you and your family.
Medicaid is government-run health coverage provided to people with limited income and resources.
Employer Provided Life Insurance
Many full-time employees also have the ability to apply for and/or purchase group life insurance for themselves (and possibly even their spouse) through their employer. The cost of this insurance benefit is typically provided at more favorable rates or, at times, even funded partially or fully by their employer. Additionally, group life insurance is also advantageous because it may allow access to life insurance to those who may not be able to obtain coverage in the private market prohibited by underwriting requirements or cost.
This is a large consideration for employees planning for the future and the unpredictable. But if you are unexpectedly laid off, like the majority of company benefits, you likely do not have the option of portable life coverage or the ability to maintain coverage at group prices. In result, layoffs could leave employees and families unprotected. Therefore, while planning for the future it may be prudent to learn more about your employer provided life insurance and what steps you can take outside of your employee suite of benefits to protect you and your family.
Managing Cash Flow While Unemployed
Unemployment is a stressful time, and managing cash flow is a critical concern for laid-off employees. To ensure that bills are paid on time, employees should prioritize their spending and look for ways to reduce their expenses. For example, employees can consider cutting back on discretionary spending, such as dining out and entertainment, until they find a new job to help fund their lifestyle outside of their core expenses.
In addition to reviewing your budget, another option for many employees who are laid-off or terminated have could be reviewing their eligibility for Unemployment Insurance (UI). This is a joint state-federal program that is administered by your state of residency and provides temporary cash benefits to those who are unemployed through no fault of their own. Your state of residency’s criteria will ultimately be the deciding authority whether you are considered an eligible worker.
Employers Can Help
Employers can assist their former employees in a multitude of ways, including hiring a job placement firm to help with the job search and leveraging the resources of a wealth management firm to provide education on financial planning. Hiring a job placement firm can help employees find a new job quickly and provide support during the job search process. A wealth management firm can help employees understand their financial options and provide guidance on managing their finances during unemployment.
Being unexpectedly laid off comes with a host of challenges, but if you find yourself in this situation, you can take the necessary steps to ensure your financial security. By understanding your options for your retirement plan and health insurance and managing cash flow, you can minimize the economic impact of unemployment. Employers can also help their former employees by hiring a job placement firm and a wealth management firm to provide support and education during this difficult time.
As a CERTIFIED FINANCIAL PLANNER™ Professional, I help employees navigate their financial options and provide objective advice on managing their finances during unemployment. If you have any questions or need assistance, please don't hesitate to reach out. For information on how to educate and empower your employees, visit our website to see the organizations we have assisted over the years: The Society of Financial Awareness.