Financial Advice for the Unemployed

Millan & Co. P.C. (512) 479-6819

Millan & Co. P.C. (512) 479-6819

One of the worst financial fears most Americans have is being laid off, and unfortunately this has become all too common.

One out of five Americans were laid off in the last 5 years. Therefore it’s no wonder most working professionals fear losing their jobs and worry about having a contingency plan in place. Preparing for unexpected events such as job loss, health challenges, accidents, etc. are imperative regardless of the economic state. What does change is how much you save and for how long.

When hard times strike financially, here are some ways to navigate next steps as originally reported by Erik Carter for Forbes.

1) File for unemployment benefits. The first thing you’ll want to do is to replace as much of your income as possible and a good place to start is by filing for unemployment benefits from your state. How much and how long you’ll collect varies by state but benefits are typically 50% of your previous income up to a cap and generally last about 26 weeks or half a year.

2) Make sure you’re covered by health insurance. Your income isn’t the only thing you’ll want to replace. You’ll also want to make sure you’re covered by health insurance, especially now that there’s a federal tax penalty for being uninsured. If you’re married, see if you can get covered under your spouse’s plan. Another option is to continue your current health insurance under COBRA for 18-36 months but the insurance is likely to be more expensive than what you paid as an employee. Finally, you can enroll through the new Health Insurance Marketplace and possibly qualify for subsidies based on your income. These options have deadlines to enroll after your employment ends so don’t delay. (If you have an HSA, you can use it to pay health insurance premiums tax-free while you’re collecting unemployment benefits.)

3) Don’t forget life insurance. While it may not feel as urgent, it’s important to make sure your family continues to be protected by life insurance as well. You may be able to continue any coverage you had under your employer if the policy is portable. If not, you can use this calculator to estimate how much insurance you should have and search for low-cost term life insurance policies here.

4) Get a handle over your budget. If you’ve never created a budget or even tracked your expenses, now is the time to start. After all, you may have to live on a reduced income for an indefinite period so you’ll want to watch every penny. Go through the last three months of your bank and credit card statements and record your expenses on a worksheet like this. Once you know where your money is going, look for places to cut back. Keep in mind that this is only for the short-term until you find a new job, so you’ll want to be even more frugal than usual.

If you’re still having trouble making ends meet, make sure you prioritize your rent or mortgage payments, basic utility bills, car payments, and food and medical care over payments on unsecured debt like credit card bills. Keeping a roof over your head, the lights on, your car in the driveway, food on the table, and you and your family healthy are all more important than your credit rating. See if you can negotiate an affordable payment plan with your creditors or work with a non-profit credit counseling agency to negotiate for you.

5) Decide what to do with your former employer’s retirement plan. The three basic options are to leave it there (if they let you), cash it out, or roll it to an IRA. Leaving your plan where it is can make sense if you want to keep a unique investment option that you can’t purchase anywhere else or if you have employer stock that you’d like to eventually withdraw at a lower tax rate. Cashing out your plan rarely is the best option since you’d have to pay taxes on any pre-tax money plus a 10% penalty if you’re under age 55. Rolling your account into an IRA can allow you to continue deferring the taxes while also providing you more flexibility in how the money is invested and withdrawn.

If you need to tap your savings and are under age 55, you’ll generally want to access your non-Roth retirement accounts last. Start with taxable accounts like bank or regular brokerage accounts. Then go to any Roth IRA contributions you have since they can be withdrawn tax and penalty-free. However, that’s still just a next-best option since you sacrifice the potential for tax-free growth. Only after those options are exhausted, should you consider dipping into retirement accounts that would be subject to taxes plus a 10% early withdrawal penalty.

For additional financial advice, schedule a consultation with Millan & Company. Call 512-479-6819 for personalized financial and accounting services in Austin, Texas.

 

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