Financial Planning When You Lose or Change Your Job

Carl DeMarco

By Carl DeMarco | January 15, 2019

Changing a job presents a tremendous financial change. Not only is your salary in flux, but all the hidden compensation – 401(k) plans, pensions, life and disability insurance – is suddenly in play, as well. Here are some of the financial planning opportunities and pitfalls that you may encounter while changing jobs – whether the change is voluntary or not.

Decisions everybody faces

The big decision in any job change is to determine what happens to your 401(k). One option is to keep the plan with your current employer, as long as it’s more than $5,000. Most employers will normally allow this. Another option is to transfer the funds over to the 401(k) plan offered by the new employer. This puts all the assets in a single place, where it is easy to keep track of. The downside is that the investment choices are limited to those offered by the new employer.

A third option is to roll the money over into an outside IRA with the help of a financial adviser. The benefit to option three is that a whole world of investments is available – the money can be put into any number of vehicles, including mutual funds, individual equities, annuities –the list goes on.

Similar decisions need to be made about pensions: Should they be left in place, or taken as a lump sum? One of my clients recently left her employer at age 54. She had half a million dollars in the company’s pension plan, which wasn’t going to grow in value in the years before she became eligible to take it. It made sense to take the lump sum payout and invest it.

Employer-sponsored life insurance is another decision point. Often you get the option of keeping the coverage by paying for it yourself, but it’s generally much more expensive than what you can buy on your own. If you are in good health, a better option may be to buy your own life insurance, in case you change jobs again or lose your job. That will mean you’re never out of coverage regardless of your employment status.

Voluntary job change is an opportunity to save

If this is a new job, perhaps a promotion, then congratulations! Presumably, you’re earning a higher salary, and I hope you will be able to save some of it. If you can keep your lifestyle and living expenses more or less at their current level, this gives you an opportunity to save without too much hardship.

Take a moment to look at the benefits you had at your old job and what’s offered by your new employer. You might lose benefits that you will need to replace privately, or perhaps you could get a better price than that offered in your new employer’s benefit package.

For example, sometimes there is a waiting period before the life insurance takes effect with a new employer. You might consider getting term insurance to fill the gap. Similarly, there may be a waiting period for disability insurance, which is a strong argument for having your own disability coverage, independent of your employer.

Involuntary job loss requires a hard look at your budget

Hard financial decisions are needed if you are let go from a job involuntarily. When you don’t have a regular paycheck coming in, the goal is to buy time to get to the next position. Negotiating a good severance package and qualifying for unemployment compensation can help.

Health insurance becomes a big issue when you lose your job. You can continue coverage through COBRA for up to 18 months. Your ex-employer may cover the cost of coverage for a certain amount of time. After that, you have to pay, or go find your own individual plan on the Open Exchange health insurance market. One nice detail with COBRA is that there is a 90-day enrollment period. Let’s say you left your job on December 31. You wouldn’t actually have to pay for COBRA coverage until late March.

Take a hard look at your budget and cut back on unnecessary expenses. Food, utilities, taxes, and the mortgage all need to be paid, but maybe you can cut the cable bill. Cut back on impulse purchases. Perhaps the kids, instead of playing three sports, can concentrate on one. Instead of dinner out every Friday, do a nice dinner at home. The little things add up.

Leaving a job to go work for yourself

Many of us have the dream of starting our own company or working for ourselves, but few of us have any idea what it really costs to run a business. For example, the employer pays half of the social security and Medicare costs. If you are a sole proprietor, you are responsible for paying that part yourself. If your new business has employees, you have to pay those costs for them, too. Then there are the costs of marketing and sales. Or, physical space. Can you run this business from your home, or do you need commercial space? Do you need business insurance?

I always caution people before they start a business to sit down with either an adviser or an accountant and get a good understanding of the numbers. Starting a new business seldom goes as smoothly as you think it’s going to go. You’re probably not going to make money for at least 13 or 14 months, so you have to have enough money set aside to get through a whole year without making money.

Whether your career transition is the result of choice or circumstance, being realistic and thoughtfully planning your next steps can give you a greater sense of control and peace of mind.

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