Leaving a job can result in a cascade of unanticipated outcomes. Whether you're retiring after decades or facing an unexpected layoff, the shift can bring a mix of uncertainty, stress, and even grief. It can also affect nearly every aspect of your financial life, from your income and savings to your benefits and retirement plan.
Navigating these realities requires a clear understanding of the steps you can take to help secure your financial well-being. Here, The Retirement Group reviews some of those action items.
When exiting the workforce, either temporarily or permanently, it's critical to have a current picture of your sources of income, savings, debts, and ongoing expenses. If you're retiring, that means balancing income from sources like Social Security, a retirement plan, or a pension with your anticipated spending. If you lose your job, it means understanding how long your savings can cover your expenses and identifying where you may need to cut back in the short term.
This review doesn't need to be complicated, but it should be honest. Many people avoid looking closely at their finances during a stressful transition, despite the importance of doing so. By gaining a clear overview of your financial picture, however, you’ll be better placed to make more informed decisions.
Whatever your reason for leaving your job, the following few months may bring some financial uncertainty, so it helps to identify the resources available to you. If you’ve built an emergency fund, this may be the time to use it. Just be sure to shore up this financial cushion once your financial footing steadies.
If your savings aren’t sufficient to meet your immediate needs, a line of credit may help fill the gap. Having access to credit before you need it is typically easier than securing it once you're no longer employed. If you own a home, however, you may be able to open a line of credit secured by your home equity.
While either of these options is a long-term solution, they can give you breathing room to cover your short-term expenses without compromising your long-term savings or retirement accounts.
When you leave an employer, you generally have several options regarding what to do with your 401(k). You can sometimes keep it with your former employer’s plan, roll it into a new employer’s plan, roll it into an IRA, or cash it out. Each choice has different tax and financial implications, so it makes sense to speak with a financial advisor before deciding.
Although there are no one-size-fits-all approaches, you may want to avoid cashing out your 401(k) as that can trigger both taxes and an early withdrawal penalty if you’re under 59 1/2. Rolling funds into an IRA or a new employer’s plan, by contrast, allows your money to keep growing on a tax-deferred basis. Take time to compare the fees and investment options across your choices before deciding where to move your retirement accounts.
While it can be tempting to pause your retirement contributions during a period of reduced or lost income, continuing to contribute—even at a lower amount—remains important. Consistently saving for retirement can make a measurable difference in the long run, and gaps can be difficult to make up later.
If you’re between jobs, consider contributing to an IRA to maintain the habit. If you’re retiring, it’s a good time to shift your thinking from contributing to withdrawing, and to work out a sustainable rate that allows your savings to last. Either way, the aim is to keep your retirement plan intentional, both during and after your working years.
Leaving a job can affect your taxes in unanticipated ways. For instance, both unemployment benefits and severance pay are considered taxable income. Similarly, if you decide to cash out your retirement plan or take a lump sum pension payment on retirement, that income is also taxable. Depending on the amount and timing of your income, it could even push you into a higher tax bracket for the year.
On the flip side, if you leave your job partway through the year, your employer may end up withholding more taxes than you actually owe.
Given the potential complexities, it’s worth reviewing your situation with a tax advisor before deciding how to proceed.
If your employer offers a pension, you may have different options depending on how and when you leave your job. For instance:
Health coverage is often of immediate concern when leaving a job, as many people are insured through their employer. If you leave before you are eligible for Medicare coverage, you may want to consider COBRA continuation coverage, a marketplace plan, or coverage through your spouse’s employer. Compare costs carefully since premiums can be considerably higher than those you pay as an employee.
If you’re retiring at or near age 65, review how Medicare fits into your plan. If you identify gaps in coverage, you may also want to explore a supplementary policy. Whenever possible, aim to plan for health care costs well before retirement, as these expenses tend to rise over time.
When you leave your job by choice, circumstance, or after a long career, your financial picture is bound to change. If you would like help navigating this period of uncertainty, The Retirement Group is here for you. Our advisors can help you review your finances, weigh your options, and build a plan that fits your circumstances and goals.