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Financial Tips After a Job Loss

Sometimes it appears out of nowhere. Sometimes you can see it coming. Either way, a job loss is a stressful and potentially devastating event. Here are some tips for dealing.

client that just lost their job is utilizing BOK Financial's online tips for financials after losing a job.

Preparing for and Surviving a Job Loss

If a job loss appears likely, it’s time to build up emergency savings, reduce your expenses and cut discretionary spending. Also consider applying for a home equity line of credit while still employed in case it is needed.

This is part of being prepared, but it warrants its own category. Trim whatever you can out of your spending, being honest about what is and what is not necessary. You can usually save money by lowering the quality of plans such as your cable TV subscription, insurance and cell phone plan. For instance, reduce your cell phone’s monthly minutes, raise your insurance deductibles or lower your Internet bandwidth for a lower monthly fee. What expenses can be lowered…or even eliminated?

Of course you’ll be looking for a new job, but consider what you can do to bring in extra income from home. Could you sell stuff on eBay, work as a freelancer, get odd jobs around the neighborhood?

Study up on what is available, ask for it, then set aside 35-40% for income taxes.

There are many assistance programs available to the unemployed — employer-provided outplacement services, financial counseling and state unemployment benefits.

Do all you can to avoid cashing in tax-deferred retirement plan assets.

This may seem like a good place to cut expenses, but you should do everything possible to maintain coverage. Squeeze in doctor and dental appointments while you are still covered by your employer's plan. Within 60 days of termination, extend coverage under COBRA law that allows departed employees to buy coverage at company's group rate for up to 18 months.

Believe it or not, some creditors will be helpful. Explain your job loss and request reduced payments or extension of time to pay bills while searching for new job. Request a forbearance agreement with your mortgage lender to eliminate or reduce payments for a set period of time.

Often, people will hide their job loss from others out of embarrassment. However, those same people you are hiding it from could be the key to a new job. Spread the word. The more people you have looking out for you, the quicker that new opportunity could present itself.

Using Your Retirement Savings to Compensate for a Job Loss

After a job loss, there is often a temptation to use your retirement savings accounts to replace the income you’re missing. In the short term, this seems like a logical choice, as these accounts typically have cash available. However, the long-term costs are significant.

A study by The New School for Social Research and supported by the National Endowment for Financial Education shows that a 10% setback (such as losing a job) typically results in as little as $1,166 less savings at retirement. But repeated setbacks add up. Four 10% income dips in a career could result in more than $10,000 in reduced savings. If you lose all your income for at least a year, retirement savings could be reduced by an average $6,218 per episode. That’s almost $25,000 after four no-income years.

Unfortunately, the study found this is more common than you might think. By age 70, 61% of workers went at least one year with no income. Worse, 25% suffered through at least four of these episodes.

Of course, affluent and two-earner households fare better than lower-income households do in such events. With few liquid assets, low-income households are most likely to dip into their 401(k) plan or other retirement savings for day-to-day expenses.

Preparation is the best defense. According to Teresa Ghilarducci, the lead researcher, “Only those with the most resources weather these storms with their retirement nest eggs intact.”

Financial Tips to Consider Before Changing Jobs

On the hunt for a new job? That could be the path to a pay raise. According to the Federal Reserve Bank of Atlanta, the wages of those who switched jobs grew at a faster rate on average than those who remained at their jobs. But salary is just one thing to consider when switching jobs. The following tips can help you prepare your finances and avoid costly mistakes.

An emergency fund provides a cushion should things not go exactly as planned. Experts say you should have enough in savings to cover three to six months’ worth of expenses. Will you get reimbursed for unused vacation or sick time at your current job? Consider putting that extra cash into your emergency fund. Trimming monthly bills can also provide cash to fund your emergency savings.

Don’t be tempted. You cannot afford to be without health insurance — and in most states you’ll pay a penalty under the Affordable Care Act if you don’t have health coverage. Find a way to bridge the gap between coverage of your current job and your new one. Adding on to your spouse’s coverage or applying for COBRA coverage through your now-former employer are options.

If you have a life insurance or disability insurance policy through your employer, check to see if it’s portable. If so, you can convert it to a personal policy instead of having to start the long process of getting insured.

Many workers cash out their 401(k) plans when changing jobs, but this could cost you money. If you’re younger than 59 1/2, you’ll pay a 10% federal early withdrawal tax penalty, plus you’ll have to pay taxes on your withdrawal at your ordinary income tax rate. Leaving it where it is or rolling your old plan’s balance into your new employer’s plan, or into an IRA, may be a better option.

Will your new job bump you into a higher tax bracket? Or, will there be a gap in employment long enough to significantly lower your level of income for the year? If you lose income, it could create opportunities for tax savings. For example, dropping into a lower tax bracket may be a time to consider converting a traditional IRA to a Roth IRA. You’ll have to pay taxes on the amount you convert, but that will be lower in the lower tax bracket. Plus, you won’t have to pay taxes on Roth IRA withdrawals in retirement — when your tax rate might be higher after years of income growth.

What to do If Your Employer Doesn't Offer Retirement Benefits

Without an employer-sponsored plan to contribute to, you might want to consider contributing as much as you can each year to an IRA. Because of their tax-deferred, compounded earnings, they offer similar long-term growth opportunities. Your tax advisor can help in determining whether you’re eligible to contribute to an IRA.

Another option to consider is annuities. A typical annuity features tax-deferred growth and provides either fixed or variable payments beginning at some future time (usually retirement). Be sure you understand things such as the fees and expenses and consider when you’ll need access to the funds as withdrawals within the first several years of an annuity investment may be subject to surrender charges.

Traditional investments such as stocks, bonds and mutual funds — while taxable — can also provide an opportunity to earn money for retirement. The specific types of investments you select will depend on your risk tolerance, time horizons, liquidity needs, and goals for retirement.

There are a variety of things to consider when thinking about investment vehicles. A financial advisor can help you understand your choices and create a portfolio that makes sense for you.

Things to Consider Before Taking Early Retirement

It is becoming more common for employers to offer longer-term employees early retirement packages as an incentive to leave voluntarily. It helps the company avoid layoffs and acts a somewhat of a “reward” for the employee’s loyalty. But there are more things to consider than just what you’ll do with your extra free time.

Does your employer’s offer include a severance package that compares favorably with your projected job earnings (including future salary raises and bonuses) if you remained employed? How long can you live on that amount without using your retirement savings? If you can’t live on that amount, is your retirement fund large enough that you can start using it early? Will you be penalized for withdrawing from your retirement plans?

Does your employer’s offer include medical insurance? If so, make sure it’s affordable and provides the coverage you need. Also, consider whether it lasts until you’re 65 (when Medicare starts). If their offer does not include medical insurance, you’ll need to look at COBRA or a private individual policy, which can be expensive.

Will accepting early retirement negatively impact your retirement plan benefits? If you participate in a 401(k) plan, you’ll not only miss the opportunity to make additional contributions to the plan, you may forfeit employer contributions that you're not yet vested in. Also, if your employer has a traditional pension plan, leaving the company before normal retirement age (usually 65) may reduce the final payout you receive from the plan.

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