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Your Investing Life: Losing your job

September 03, 2013

Losing a job can be devastating, whether it happens suddenly or you see the writing on the wall for a while. While you cope with the impact it will have on many aspects of your life, here are a few steps you can take to protect your investing and financial life and reduce the stress you feel as you deal with the situation.

Don't panic

Unfortunately, job loss is often a fact of working life, especially in today's environment. It's happened to most of us at least once. Before you do anything, take a deep breath. Give yourself a little time to get over the shock (which you'll likely feel even if you saw it coming). Call a friend or loved one to get the emotional support you need.

Your family life. Your work life. Your investing life.

When "life happens," your financial and investing plans can sometimes get moved to the back burner. These articles can help you bring your investing life—and its effects on your (and your family's) financial future—back to the forefront.

» Starting your first full-time job

» Going back to work

» Going part-time

» Changing jobs

» Starting your own business

» Going back to school

Hold off on taking steps such as cashing out your retirement plan, selling off long-term investments, or moving until you sit down and look at how much (if any) in emergency savings you have set aside and whether you'll have any income from unemployment benefits, a part-time job, or other resources.

Apply for unemployment benefits

If you were employed rather than running your own business, file for unemployment insurance benefits right away. It can take 2-3 weeks to start receiving benefits, so this is the one area where you don't want to wait. Most states offer online filing. Along with filing for any state benefits for which you qualify, you'll file for federal benefits on your state's website.

Keep in mind that you might not qualify for benefits. Your former employer may need to confirm that you were laid off, rather than "fired for cause" or resigned, and that you're entitled to receive benefits.

Prepare your budget for the change

It's a good idea to go over your budget (or make one if you don't have one in place) to see where you can trim some spending.

First, review your income sources—unemployment benefits if you qualify, freelance income, severance pay, investment earnings you might have, support from a working spouse, or alimony payments if you're divorced—and ask yourself what you can realistically count on.

Then study your expenditures. List your expenses in order of importance: mortgage/rent, utilities, groceries, car payments, transportation, insurance premiums, etc. Look for opportunities to economize. Can you eat at home more often? Scale back on cable channels?

Amy VogtOne important expense to consider: Your health insurance. Even if you qualify for COBRA, which lets you stay in your former employer's health plan for up to 18 months, "your premiums could be higher than they were if you had group coverage with your former employer," said Amy Vogt, a senior wealth planner with Vanguard Asset Management Services™. You may decide to buy an individual insurance policy so you're prepared for a health emergency. No matter what your choice, be sure to adjust your budget to absorb the cost.

If you own a home, read your mortgage documents to see if you have mortgage unemployment insurance to cover your house payments. Do the same with your credit card agreements. Many issuers offer insurance that will make payments for you while you're unemployed.

Try to avoid paying expenses with debt, including borrowing against your life insurance or other investments, if you have them. It might be difficult, especially if you spend a significant time between gigs, but keeping your debt burden as small as possible during this time will help you for years to come.

Evaluate your options for lump-sum payments

You may have received a substantial severance package from your former employer, particularly if you worked there for a long time. That lump-sum payment may come with an unexpected consequence.

"You don't want to be caught off guard with a big tax bill related to a lump-sum payout," said Ms. Vogt. "A financial advisor can help you decipher whether you have the option to spread out your severance payments over more than one year, and also suggest an amount you can set aside to cover any taxes due. An advisor can also help determine how much you should keep in a cash reserve during this transition time."

Beware of penalties for early cash-outs of retirement savings

Colleen JaconettiYou may also have savings in your employer's retirement plan. If possible, try leaving that money alone for a while. "Consider tapping savings in your employer's retirement plan as a last resort," said Colleen Jaconetti of Vanguard Investment Strategy Group. "The impact of penalties and taxes can significantly reduce the amount you'll have available to meet your current spending needs. Also, giving up the tax-deferred growth on these savings can lower the amount of spending your portfolio can support in retirement."

Your former employer may send you a check if you have $5,000 or less in your retirement plan account or if the plan prohibits former employees from remaining in the plan. Resist the temptation to keep the cash. Rolling that money into an IRA will protect you from incurring tax penalties, especially if you're younger than age 59½.

Explore retirement-date options

Depending on your age, health status, and the size of any severance package you've received, you may decide to move up your retirement date. Our retirement planning center has a range of information and tools that can help you work through this process. You'll also learn more about the options available to you for handling your retirement savings once you begin to draw on them to meet your living expenses.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • For more information about Vanguard funds, visit Funds, Stocks, & ETFs or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
  • We recommend that you consult a tax or financial advisor about your individual situation.
  • When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
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