It’s one of the worst moments that can happen to you while working – getting laid off and losing your job. And guess what? The job market and economy is still weak and millions of Americans don’t have a stable job. Even big companies, like Wells Fargo, are announcing layoffs. In fact, I was just talking to a friend last week whose whole company shut down and she lost her job. Things like this can happen…and they do happen.
If you think you’re going to be laid off (or even if you have a stable job), there are a few things that you should do financially to be prepared. Here’s how you can prepare your investment portfolio for possibly losing your job.
Understand What You Have
The first thing you need to do is understand what benefits you have from your employer. On a basic level, this means understanding any severance package that you may receive. However, if you really want to be prepared, you should spend your next Friday afternoon wading through your company’s HR website and see all of the different perks they offer. You’d be surprised to learn that many companies offer a wide variety of benefits to their employees, and may companies will agree to continue these benefits for a time after you’re laid off.
Some examples of benefits that you could benefit from when you lose your job include:
- Financial Planning Advice – Use this to discuss your best options for your current financial situation, especially if you don’t have income coming in
- Legal Advice – Use this if you need to setup any estate instruments, like a will, trust, power of attorney, etc.
Finally, make sure that you check if you have a pension as well. Many times, this can get lost in the fray, and you may not even know you have money sitting in an account for you. If you do have a pension, make sure that you know whether you can take a lump sum, or if the company requires you take a defined annuity in retirement.
Decide Your Retirement Plan Options
If you have a retirement plan at your employer, you need to decide your retirement plan options. This is important for a 401k or 403b that you may have. In general, you have four options:
- Keep It Where It Is: Like Harry discussed several weeks ago, you can simply keep your 401k at your old employer. This is the simplest option, and it requires nothing on your part. If you don’t elect to do anything, and you meet the minimum account balance required by your old employer, your 401k will simply remain. It will perform with the same funds that you invested in originally – but it won’t get any more contributions to it, and you can’t contribute any more to it.
- Transfer To Your New Employer’s 401k: When you get a new job, you can typically transfer your old 401k into your employer’s new 401k. This can be a good option if you like the simplicity of not having a lot of accounts. Also, if your new employer has a good 401k plan, this can be a great solution for you.
- Rollover to an IRA: This is main option that many financial planners recommend. This is where you roll your 401k over into an IRA. This is a great option because it allows for a lot of choices in investments – much more than you would receive in a typical 401k account. Plus, by having more control, you can typically get better fees that sticking with a traditional 401k account. I’m a fan of TD Ameritrade for opening an IRA, because they have no account fees and $0 commissions for stocks and ETFs.
- Cash Out: Finally, you could simply cash out your 401k or 403b. This is a terrible option, but some companies automatically cash out your 401k if it is below a certain minimum amount, usually $5,000. Then, it’s on you, to roll over the account. If you deposit the funds into your checking account and don’t complete the roll over, you’ll be subject to taxation and penalties on the amount you cash out. Don’t do this!
If you have a pension that offers a lump sum, you can also follow these guidelines. You can typically elect to take the pension as an annuity, your can roll over the pension funds to a rollover IRA, or you can cash out. Once again, the Rollover IRA is typically the best choice.
Make Sure You Have Assets You Can Touch
Finally, when looking at your portfolio, you need to make sure that you have assets that you can touch should you need to. Most experts recommend at least a 6 month emergency fund, but what if you are unemployed for longer? You may want to use your investments to support you. If you have all your assets in retirement accounts, you’ll be subject to penalties and extra taxes if you withdraw the funds. This just makes it not worth it! Second, if you have to declare bankruptcy due to your financial situation, retirement accounts cannot be touched by creditors. So, it’s to your advantage to NOT withdraw from your retirement accounts.
Here’s what you should do:
- Emergency Fund First – As I mentioned above, you should be using your emergency fund first. This should be cash saved in a checking or savings account that you can easily access and pay nothing to touch. Try to keep at least 6 months of expenses on hand in one of these accounts.
- Brokerage Accounts – If you want to invest, but not tie up your money for retirement, you should invest a little in traditional brokerage accounts. This money is always available to you, but you will pay more taxes on your investment gains in the account. The benefit is that you can access this money easier – for an emergency like losing your job, or even for something like buying your first home.
- Don’t Touch Your Retirement Accounts – I can’t stress this enough. Just don’t do it. Your money is protected from bankruptcy. Your money is sheltered from taxes. Just leave your money there. It’s not worth taking it out to pay a few bills in the long run. If you need to, here’s how to access money in retirement accounts without taxes and penalties.
What other steps can you take to prepare your investment portfolio for retirement?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.