Ep # 44: Navigating The Financial Impact Of A Job Change
In this episode:
- Cash Reserve & Liquid Assets -1:47
- Review Expenses - 6:28
- Filing for Unemployment, if necessary - 7:24
- Understanding your Severance - 8:02
- Health Insurance Options - 10:40
- Retirement Plan Options - 12:47
Watch the full video on YouTube:
Benjamin Haas 00:03
Hi everyone and welcome to A/B Conversation, where we will help you CFP your way out of it. A podcast where you get into the minds of a Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Topic today.
Adam Werner 00:28
It's come up a lot even with recent clients coming to us and that would be change in employment. Whether that was voluntary or involuntary, right, I'm either changing jobs for greener pastures or maybe it was an involuntary layoff, business closure, whatever that may look like but we created a checklist. Just things to keep in mind as you're going through that transition, obviously from a planning perspective or let me piggyback on that. I think in this very new economy, it feels like we got used to working from home but now there's kind of this debate on what is the new workforce going to look like depending on the type of job that you have. I know I have a lot of people close to me in life that are, maybe I don't want to do this anymore, maybe I want to explore that. I would also hope that our checklist today is maybe a good conversation starter for the things that people should be thinking about financially beyond just where am I going to spend my 40 hours a week, 50 hours a week, whatever it is. So shall we start at the top?
Benjamin Haas 01:45
Yes, the top not the bottom.
Adam Werner 01:47
Fine, let's start in the middle. So number one and this is like financial planning basics 101. No different here, cash reserve. We like to preach anywhere from three to six months of expenses so that God forbid, you were in a situation where that decision to change jobs was an involuntary one, that you do buy yourself some time to stay on your feet and find that next path, whatever that may be. Reviewing your cash reserve situation and then it's not just cash savings in the bank, it could just be where do you have access to liquid funds without having to necessarily dip into a retirement account that would have penalties or tax implications on top of just needing to access funds in the short term.
Benjamin Haas 02:40
Yeah, so two immediate thoughts. One, I think we do work with people that look to be incredibly efficient. Sometimes we categorize them as "maximizers" and when you look at the savings rate at the bank, right now, you're going, man, why do I have all this money sitting in cash. It's a wasted opportunity, I should be investing it. Well, this life transition is one of those moments where you probably need more in reserve than you would think if you got laid off. It's now supposed to cover a period of time. If you're moving or relocating, I mean, the dominoes of expenses. It's now a new environment, it's a new town, new expenses, a new cost of living, who knows? I think it's really important even if you think that this may be something that happens to you in the near term or that you would be looking to change in the near term, that you think of that savings cushion as maybe even a little bigger than that.
Adam Werner 03:34
Yes, and I think this will kind of be a running theme as we kind of go through this checklist. I think it's different viewpoints on whether it's, I think you kind of hit on it earlier, right? If the work from home environment just doesn't feel like a fit or just the cultural environment at work just seems to be heading in a different direction now that maybe things feel maybe a little bit different, the difference between being laid off and maybe this being a conscious decision to do something else, being prepared for that transition, maybe not going exactly as smoothly as one would hope and that's just kind of the way that we approach planning in general. You prepare for the worst and hope for the best. So yeah, having a little bit more cash, while not the sexy advisor thing to say, it gives flexibility in times of transition.
Benjamin Haas 04:27
Yeah, bingo. That's the word that was like, I was ready to jump on as soon as it turned back to me. That part of going through big life transitions, job change being one of them, is being nimble and being flexible. While it's really awesome to sock as much money as you can away into a retirement account, that does not fit the definition you gave as money that you can quickly get your hands on. So I think broader financial planning for us, people think about cash, they think about retirement accounts. You can invest outside of a retirement account. You can build a bucket of assets that hopefully grows more than the savings account. But if you need liquidity within a week, you can get to that money without some sort of IRS penalty and I think that's the bucket where more often than not, when we meet someone for the first time, that one maybe hasn't been front of mind and it would serve for major flexibility, in my brain. It could end up being retirement money, it could end up being for a job transition, kids’ education, whatever else intermediate goal, that's not cash sitting in the bank.
Adam Werner 05:36
Yeah, and that's the point of that type of an account. It's either called a non-qualified account or a non-retirement account. That it's not tied to any either specific goal or again, it's not locked up like a retirement account that you can't access before 59 and a half, it truly is flexible for these times in life where you can continue to let it grow if you don't need it or if you do need it, it's there and accessible without any sort of penalty.
Benjamin Haas 06:02
Yeah, the pushback would be you don't get a tax deduction for putting money there like a retirement account or you don't get tax free growth like you might in a Roth and you're going to have to pay taxes if you make money there. But again, that's the tradeoff for the flexibility and we do find the flexibility to be really important. So yes, I'm sure I was going to say beat that horse but that's really, really rude. Okay, how about the next one, Adam.
Adam Werner 06:28
PETA is going to be all over this podcast. So the next one, some low hanging fruit, reviewing your cash reserve and now it's just reviewing your expenses. I'm sure for the most part, even our "maximizer" clients have some belt tightening that they could do some subscriptions that they aren't using, right? Cut out those things that in a period of transition, if it truly is kind of an unknown period of time that you need to bridge, being able to trim what you can quickly to not only stretch, whatever cash reserve, you do have, again, to make that last a little bit longer. But we've certainly experienced this with clients too, that if they're going through that transition, you cut certain expenses, sometimes when you get on the other side, you didn't miss what you didn't have for a little bit of time and again, that that's not in the long run and that's not necessarily a bad thing, either.
Benjamin Haas 07:24
Yep, I think that's as self-explanatory as it gets so I'll move to the next one. Certainly, if you get displaced, it's usually means one of two things are going to happen. You're going to have the ability to plug into unemployment and certainly post COVID world, I think people are probably more familiar with unemployment than we as a society have ever been. Understanding what that is, the other side of it we see people displaced by job but they're receiving some sort of severance. So maybe we should talk about what that is, what our experience has been on the different ways that people receive it, and I don't know, give some tips and tricks there too.
Adam Werner 08:02
Yeah, I think the number one thing. Well, let me take a step back. Obviously, if you're getting some sort of severance that can act as your bridge in that time of transition and hopefully keep your cash reserve intact. That you can live off of that severance until you find other employment. The one thing that we have seen lately is to be very mindful of when that severance is payable and when the taxes are due. So, I'll give a scenario.
Benjamin Haas 08:37
This is earned income, I guess that's the point. Yes, this isn't a gift. This is replacing future income.
Adam Werner 08:45
Yeah, and that's the key point. So let's just run the scenario that you worked through September of last year and you're laid off. You receive a severance sometime in October, let's say they pay you a year's worth of severance. Not only now have you earned nine months of your normal salary but now you're going to take another year's worth of your salary and you pile that all into one taxable year. The tax impacts can be quite significant and you just want to be mindful of number one, acknowledge that come tax time, I'm going to have to eat some of these taxes and it may bump me into a higher bracket than I'm used to but there may also be some planning things to be able to defer some of that income. Maybe it's contributing to retirement accounts like we talked about earlier. Yeah, to be able to get some deductions but we've also seen a lot lately too depending on the timing, some of these companies are giving some flexibility of when. You can dictate when this severance is going to come to me. That's a company-by-company thing but it's just something very important to think about when that severance comes to you, to your point, it's not a tax-free gift. That is going to stack on top of whatever other income you showed that year so just be mindful.
Benjamin Haas 10:02
Yeah, and I think that's where we would want to, again, play a role for people that may have some questions here where you really can think about the dominoes of these individual decisions if you're given those options. I do think it comes back to flexibility and you said it well. There may not be a whole lot of choice that you have but then understanding what the tax consequences of that are. How that may fill a role with what you may do with the other things we're talking about. Expenses, cash reserve, what can get thrown into retirement account, all these things work together so I do think it's really important to have that conversation.
Adam Werner 10:40
So another one and maybe it's obvious but health insurance. If you are now displaced and let's say that you as the employee, all of the health insurance, your family's health insurance was all through that employer. Now, you're going to have to cover that gap. In the meantime, so thinking back to the cash reserve component, certainly in our experience, you know, Cobra coverage is an option. However, that usually comes with a much higher cost than you were used to covering as the employee if the employer was covering part of those premium payments.
Benjamin Haas 11:24
Yeah, and that's just it. Most people would be used to seeing what comes as a deduction out of their paycheck and maybe not acknowledging that the employer is probably covering a chunk of that too. So on Cobra, you're responsible for all of it so we go back to hey, let's look at the cash reserve, let's think about expenses. This is one of those things that you're allowed to be on Cobra for 18 months but it absolutely behooves people to think about what are my other options at this point. If you do have a spouse that also has benefits, this could be a triggering event to shift towards some sort of other plan. There could be marketplace coverage that you would want to go to depending on the type of plan that you want and hey, tying in something completely different but we've become a big fan of health savings accounts. If this is something that you had built up, it may provide you some flexibility to say, well, I've got some savings, I can cover health care so maybe I want a higher deductible plan that I can get over here. That's not this Cobra or spousal benefits or anything of that nature. It's definitely one of those things that now is going to greatly impact your finances so flexibility on the front end is important but definitely explore it if you're going through a job change or a layoff.
Adam Werner 12:47
Yeah, absolutely. Another one on that front is retirement plans and at this point, voluntary, involuntary doesn't matter, if you're separated from service, you have some options with your retirement account. I'll use the 401k, as an example and one of the pitfalls, again, unfortunately, that we've seen, if anyone has a 401k loan that they're paying back through their payroll deductions. They took a loan out from their own investment account rather than take a loan from a bank. Once you are separated from service, that loan becomes immediately payable so if you were on a three-year payment schedule, that schedule is now shortened to ASAP. If you don't have the funds to pay it which would not be shocking if you're now going through a job transition, that balance, whatever that outstanding loan is becomes taxable income to you in that year. So, not only is that potentially now more income, now maybe potentially more taxes owed but if you're under the age of 59 and a half, they could also now come with a 10% penalty on top of that.
Benjamin Haas 14:07
Yeah, all of this Adam sounds like public service announcement: do not take a 401k loan. Unless you really have too in which case, you should have then exhausted all the other more traditional ways they like to get a loan. Don't just get a car loan through your 401k, don't just get a personal loan through a 401k. Not only are all these things that you said bad but you are actually paying that back with after tax dollars that you'll be taxed on future too. Not to get into the weeds I just want to be clear; we're not endorsing 401k loans but solid point that if you have one and you get displaced, this is now the reality.
Adam Werner 14:44
And often what we've heard, again, we've heard enough times that that was a surprise going through that process for those people that have had that. I don't think that component of it is common knowledge.
Benjamin Haas 15:00
I was going to say there's the other side of this that if you have any retirement benefits sitting out there, you would need the education on what your options are. Whether it is best to stay in that old 401k plan, whether that can be moved into a current employer provided plan, or whether you want that under your own control of something like an IRA. There are, if it's all pretax dollars, like it's all one in the same to the IRS, you just have to figure out where you want to have things. While I would say this is not on the immediate to do list like reviewing your cash or figuring out your health insurance and your unemployment or severance benefits. This is an opportunity for you to maybe take greater control over your financial life and now have a retirement account that is tailored to what you want to have happen as opposed to just being a participant in some sort of other plan.
Adam Werner 15:54
Yep, well said.
Benjamin Haas 15:59
Just a minor detail to that. I think it's becoming more popular and certainly we're giving more frequent advice for people to understand the different options within a 401k plan on whether money is going into pre-tax or post-tax. That's the whole Roth IRA, Roth 401k being the same kind of mindset. It is worth absolutely exploring what do you truly own inside of there and how is it going to be taxed. To know what kind of account structure you need if you're going to now quote unquote, do it yourself and an individual retirement account.
Adam Werner 16:32
Yes. Good point.
Benjamin Haas 16:35
Last thing on that, oh, I feel like I'm on a roll. I think we are certainly dealing with more of a generation where the whole job change thing is actually more frequent than it would have been 40 years ago. We're, yeah, we're from the same company for 40 years and you've got your company pension. It is absolutely common for us to meet somebody who goes, I've got like three or four 401k’s sitting out there, absolutely normal. At some point here, it really, in our opinion, makes a whole lot of sense to understand the benefits, pros and cons of consolidating things so that your own personal money management feels like it's a little more organized.
Adam Werner 17:15
I am certainly a proponent of simplification and yes, if I had multiple different accounts out there, I would absolutely want to just try to make my life as simple as possible, be able to track one statement, one company, one account, whatever that may look like rather than try to be following these things that are just kind of floating out there and I think most people fall in that camp as well.
Benjamin Haas 17:44
Educated, compliance, educated, education.
Adam Werner 17:48
Education only. We're not allowed to tell you this is what you're supposed to do but yes it does in an unfortunate situation that yet an involuntary layoff, it does provide that opportunity for again, I think he said very well to take control and to be able to dictate more of the path that you're going down than it is just simply the 18 investment options within the 401k that may or may not fit your situation moving forward.
Benjamin Haas 18:12
So that leads me to one more thought on that because simplification is something that people choose to do consolidate it into an IRA, there are absolutely good financial planning reasons to not do that. If you are approaching retirement age, you're not yet 59 and a half, that's a really important age in IRAs, and you have a 401k. It may make a lot of sense because the rules on pulling money out of their penalty free, are different than the IRA. So it truly, we're not just joking about compliance at this point, it is always worth speaking to a professional before making a big decision on where are you moving money to make sure that you've considered truly what your situation is and what's best for you.
Adam Werner 18:58
I'm very glad you said that. That is absolutely one of the things that there are so many little details that go into many of the things that we've already shared today that if you have any question at all, certainly reach out to us. We can be that resource to at least, if not tell you exactly what to do at least avoid those potentially simple mistakes that you may regret making.
Benjamin Haas 19:27
So maybe I'll button this whole thing up with what feels like a typical theme for us as we get to the end of these podcasts. It's to give a little bit of the personal side of this, the behavioral finance side of this. More often than not, these job changes are absolutely emotional times. Change is not always comfortable. Change can also be scary. You throw in a bunch of confusing things around finances and you may just feel overwhelmed. Perfectly cool to reach out to a group like us and just say I have to get my head wrapped around this. I need some help. Help me filter through some of these decisions. That is why we are here so give a call.
Adam Werner 20:10
Yep, absolutely. We did it.
Benjamin Haas 20:18
Right back at it, like we never left. Just like riding a bike. Alright, Adam.
Adam Werner 20:27
See you next time. Bye.
Benjamin Haas 20:35
Hi everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
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