What to do if you have been impacted by a Layoff
Layoffs rocked workers across all sectors in 2022. The tech world was hit especially hit hard, with companies like Amazon, Twitter, Meta/Facebook, and DoorDash reporting mass layoffs. Business and professional jobs saw significant layoffs, as well—2.12 million throughout the year. Some companies, such as AMC Networks, have announced plans to lay off employees soon.
This follows 2021, which saw 17 million layoffs across all industries.
Many of those who experienced a layoff or separation from their job quickly scrambled to ensure they could afford food, bills, and other necessities. 46% of those polled reported feeling unprepared for layoffs or separations.
No one will ever fault you for making ends meet in any way you can. Unfortunately, lost in the shuffle of sustaining our present, we sometimes ignore how our actions—or inaction—could affect our future.
Today, we’re talking about the financial steps you should take when impacted by a layoff, and how to keep your retirement savings intact even during the worst circumstances.
Create a budget
When facing any financial hardship, it’s important to take a full inventory of your current monetary situation. Create a detailed budget that includes such items as:
- How much accessible cash you have in your checking and savings accounts
- Your total monthly expenses—bills, necessities (food, gas, etc.) subscriptions
- Debt repayments—loans, credit cards, etc.
- Any additional income you might receive
When creating a budget, try to gain an understanding of how far you can stretch the money you currently have. If you can, cut any unnecessary spending.
The problem with early retirement withdrawals
Part of the goal is of creating a budget is to avoid dipping into your retirement savings. While making withdrawals from your 401(k) or other retirement plans might eventually become necessary, it should be a last resort.
This is because making early withdrawals from your 401(k) can come with a few big disadvantages.
First, withdrawing money from your 401(k) before you turn age 59 1/2 can come with heavy penalties—up to 10% of your withdrawal!
Second, there’s opportunity cost. Because retirement plans are investment accounts, they’re designed to grow over time. Once you take money out, you lose the opportunity for that amount to grow and build more wealth. It’s difficult to recoup this kind of loss and it can greatly affect your retirement.
Avoid abandoning your 401(k)
Whenever you change employment—regardless of the reason—you risk abandoning your employer-sponsored 401(k). Abandoned 401(k) plans are a common problem that leads to a lot of lost money: according to Capitalize, there was over $1 Trillion lost to abandoned 401(k)s as of 2021 (one of many shocking 401(k) stats)!
The best way to avoid abandoning your retirement plan is taking control over it as soon as you can. Odds are, one of two things will happen to your retirement funds after your employment ends. Either:
- Your account closes, and they send your money to you
- Your account remains open and stays with your former employer
Under the best circumstances, your former employer’s retirement plan offers varied and unique investment options that grow in ways that suit your needs. If that’s true, you might choose to keep your 401(k) with them. However, you risk forgetting your plan exists or worse—your former employer going out of business. Additionally, the company could change the rules associated with your plan, making it more difficult to maximize your contributions or access your account.
Usually, you’ll want to take your retirement savings with you. Luckily, there’s a simple process to roll over your 401 k from your previous employer to a new plan.
Performing a 401 k rollover
There are two methods for performing a 401k rollover: direct and indirect. The primary difference between the two is whether you take control of the money before rolling it over into your new account.
Whichever method you choose, you must perform the rollover within 60 days of closing your account. If you don’t rollover your funds before the grace period ends, it becomes income and you’ll be required to pay taxes on it at the end of the year.
Before performing a rollover, it’s important to make sure you have a new 401(k) account. If you’ve found new employment, you can likely enroll in a new plan when you begin work. Otherwise, you can search online for a new plan that fits your needs and retirement goals.
Method 1: Direct rollovers
Direct rollovers are ones where your money goes directly from your old plan to your new one. You can contact your previous plan administrator, provide them with information about your new plan, and have them transfer it directly.
Sometimes, your previous plan administrator won’t be able to send it directly to your new one. Instead, they’ll liquidate your account and mail you a check for the full amount. In that case, you’ll have to use the second rollover method.
Method 2: Indirect rollovers
In an indirect rollover, you become the middleman. Your account is closed and you receive a check for your full amount. It becomes your responsibility to send the funds to your new plan.
To do so, we recommend contacting your new plan administrator and following their instructions for depositing the money into your account.
Traditional vs. Roth 401(k)
Traditional 401(k)s are often the default option when you sign up. The contributions come directly out of your income before you pay tax on it. This technically lowers your year-end income, potentially lowering your annual tax. However, once you make any withdrawal (including distributions once you retire), it’s considered taxable income.
Roth 401(k)s are another popular option. They feature post-tax contributions. So, though you must pay tax on your income before you contribute, you can receive tax-free distributions once you retire.
When you perform a rollover, you can choose to roll your traditional 401(k) into another traditional 401(k), a Roth 401(k), a Traditional IRA, or a Roth IRA. If you have a Roth 401(k), you can only roll it into another Roth 401(k) or Roth IRA. Each comes with their own tax requirements and investment choices, so consider shopping around.
Rolling over a traditional account into a Roth account is called a Roth conversion and comes with rules and limitations. We recommend speaking with your financial advisor before changing account types so you can better understand any tax obligations or other penalties doing so might incur.
Apply for unemployment
Unemployment insurance can replace much of your lost income following a layoff. Each state has their own requirements for how to apply, so it’s best to search online for your local rules and regulations. Most states allow you to apply online.
There can sometimes be a wait for your application to be accepted or for checks to arrive, so it’s best to apply for unemployment benefits as soon as possible.
Find health insurance
If you’ve lost your health insurance because of a layoff, consider finding a replacement healthcare plan—even if you don’t currently have any medical expenses. Medical emergencies are often expensive. And, without insurance to protect you, an emergency could quickly deplete your savings.
Luckily, there’s a public marketplace for health insurance options. You can browse online to find a plan that fits your budget and comes closest to meeting your medical needs. Dental and vision plans are also available and can be found by performing a search online.