What Do You Do With One Year's Salary After A Devastating Betrayal?
Maybe you saw the writing on the wall, or didn't see it coming at all. One day, the boss called you into his office, "Look, Jim, there's no easy way to say this..." And then he said eight words, one devastating betrayal: "We're going to have to let you go". And that's it. A handshake, maybe a company pen, maybe even a going-away party. A final "thank you for your service". Oh, yes, and one year's salary as a severance package.
First Step: Ask Your HR Department For A "Laid Off" Letter
This letter will explain the reasons for your job loss in detail. Review it carefully for errors and see if it reads like a generic layoff letter. If it does, ask HR to tailor it to your specific situation: you may need it when you apply for a new job. Even if you feel like you're being squeezed out of the company, it's a good idea to be friendly towards HR, even if that's the last emotion you're feeling right now.
Ask For A Recommendation Letter
Despite your loyal employer of 20 years laying you off, if they're not doing it because of poor performance, you'll likely still receive a stellar letter of recommendation or referral. If one isn't provided promptly, ask your HR department for one. Again, this will help you when applying for a new job.
Inquire About Your Health Insurance
Were you covered by the Consolidated Omnibus Budget Reconciliation Act (COBRA)? If so, your health insurance could still be valid for you and your family for up to 18 months post-termination—of course, this comes at a premium. You may be required to pay exorbitantly for the coverage, up to 102% of the cost of the plan!
Collect Your Final Paycheck
Your next step is to collect your final paycheck and clear out your things. If you're leaving a company you've been with for a long time, this could be the hardest part. Despite the severance pay, it's possible that your final paycheck is the last one you'll see for a while. Treat it like any other paycheck, but bear in mind you'll be receiving a severance package soon.
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Ask About Your Severance
If you've already been told you're receiving a severance, it's okay to ask questions about it. Neither federal nor state laws across the United States mandate that severance is paid, so your company doesn't have to pay you anything. But it's good to know what you'll be getting. The "standard" is generally one week of pay for every year of service to the company, but severance packages can include a variety of things.
What's Normally In A Severance Package?
To reiterate, a severance package is not required by law, but most companies will offer them to their employees as a gesture of good faith and to be competitive within their industries. Severances can include a lump sum payment, continuation of benefits for a specific period, and even job placement assistance from your former employer. If yours includes a year's salary as a lump sum payment, that's about the best you can ask for.
"What Do I Do With A Year's Salary," You Ask?
Consider your immediate receipt of your annual salary as your cushion to decide what to do next with your life, assuming you don't want to go right back into the workforce. Depending on the terms of your employment contract with your former employer, you may not even be able to re-enter the workforce in your specific industry right away.
Before That: Register For Unemployment Benefits
You'll definitely be able to receive unemployment benefits. It's imperative that you register for these benefits as soon as you're able to do so. That way, you can continue to collect some percentage of your paycheck. The average recipient receives about $1,600 per month in unemployment benefits, for a maximum of 26 weeks.
Take The Pressure Off Your Emergency Fund
Unemployment benefits aren't intended to replace your paycheck. But they are intended to provide financial relief while you search for a new job, taking the pressure off your emergency fund. If you've never had an emergency fund, put some of your severance package into a separate account and that becomes your emergency fund.
What If You're Ineligible For Unemployment?
Some US states consider your severance package to be a substitute for wages, therefore making you ineligible for unemployment benefits. Or, you could be ineligible for them until your severance package timeline has elapsed, so, for one year (if you received a year's severance). If you find yourself in this situation, you're going to have to rely entirely on your severance for income.
Roll Over Your 401(k) Into A Roth IRA
If you hadn't already set up a Roth IRA, now would be a great time to do that. As the employee, you can either cash out the balance of your company's 401(k) (a good option if you've been with the company for a long time and have a healthy balance), or you can roll the money over into an Individual Retirement Account (IRA), preferably a tax-free account, like a Roth IRA.
Beware The Contribution Thresholds
If you already have a Roth IRA that you've contributed to faithfully, it might not be advantageous to roll over your 401(k) into a Roth IRA because you'll exceed your contribution limits and be hit with massive penalties for doing so. Be very aware of this before you excitedly decide to roll it all into your Roth for those tax-free gains.
What If I Have A Defined Pension?
In cases where you have a defined pension plan, your employer may choose to pay out your pension plan in the form of an annuity (an annual payment for the duration of the money in the pension fund) or pay it out as a lump sum.
What To Do Without EI On A One-Year Severance
Suppose that you don't qualify for, or have a significantly reduced EI check, because of your one-year severance. What should you do with the money instead? Of course, this depends on the amount your severance was for, but let's say it was for a traditional annual salary of about $60,000.
Understand The Tax Consequences
Please note that your severance pay is taxable in the year that you receive it. Your employer will submit this information on your W-2 form and will withhold the appropriate taxes. You likely won't have to pay the piper anything extra, but your tax bill could look a little different in the year of your layoff.
Slow Down & Prioritize
Your first instinct may be to hop right back on the employment train. Well, depending on the size of your severance package, you may have more time than you think. Slow down and think rationally. Do you have the basics covered within your household without needing to dip into your severance too much? Think about your priorities.
Give Yourself A Grace Period Before Starting To Look For New Work
Whether you've been super-conscious about money your whole life or more spontaneous, it's important to give yourself some time to process before you start looking for new work—especially if you've been with a company for a long time. Maybe it's a good time to start looking for a different field?
Come Up With A New Budget
Although you may have been given a year's salary when you were let go, you should still come up with a new budget that reflects this year's salary. That one-year mark is your financial horizon: you know that if you budget effectively, you could possibly make the salary last for one full year. If you need to use most of your salary for day-to-day expenses, incorporate that into a new monthly budget.
Decide On Your Severance's "Fun" Percentage
Everyone deserves to have some "fun money", even built into their monthly budget. While you might be tempted to go a little crazy with your severance package, try to resist the urge to have too much fun right away. Decide on a percentage of your severance that you're willing to spend on "fun". These are all non-essentials, things like vacations, home renovations, new "toys" for you or your family. Work out what percentage of your severance you're willing to sacrifice toward fun and put this into an accessible bank account.
Pay Down Your High-Interest Debts
As part of your budgeting, figure out what your high-interest debts currently are. Do you have a car loan, student loans, or a mortgage? If you have high-interest debts that are not your mortgage, pay those off with your severance, presuming it won't wipe out your severance completely. If it does, re-think how much of your debts you're willing to pay off with your severance. Do not wipe out your severance completely by paying off debt.
Fund Your Retirement Account
Presuming you haven't got much in your company's 401(k), use some of your severance to fund your retirement account. Put away 15% of your severance into a retirement account of your choosing (preferably a Roth IRA). Once that's done, you'll have the rest of the money to live with, having paid off your high-interest debts and paid into your retirement.
Invest In Yourself
One of the best things you could, if you were so inclined and if it would provide you with greater career choices down the line, is to invest in yourself. You could take a college course or two and pay for it with your severance, giving you more options when you do go back to work.
Take A Trip With The Family
This should be part of the "fun" percentage we've talked about, but it's important that you actually have fun with your severance package, particularly if you're taking this time off work anyway. Let your kids and your significant other enjoy your company. Take that dream trip you've always talked about. Money may come and go, but you'll only live once.
Pay Off Your Mortgage (If It Doesn't Wipe Out Your Severance)
Presuming that paying off your remaining mortgage won't wipe out your severance package completely, it might be a good idea to pay that off next, once your high-interest debt has been eliminated. This will mean you are completely debt-free and means that when you do go back to work, your income won't be going toward a mortgage—instead, you can do more of what you want with your money.
Treat Yourself To Something Special
Even if you don't consider a trip with the family to be a self-treat, it's important that you spend some of your severance money on you. After all, you did work hard for 20 years! You earned it. Get yourself something nice. Maybe a new car, camera, or that particular tool you've been saving up for. Spend it on something that will enrich your life.
Invest In Your Kids' Education
If you haven't already, open a bank account to start saving for your kids' college/university education. Sure, if you can pay for it all for them with your severance and have enough left for yourself, go forth! If not, put a percentage of it into an investment account and let it grow. By the time it matures and your kids are old enough to use it, it may have accrued enough value to pay for their education entirely.
Kick Back & Relax A Little
While you may be a little nervous, it's important that you allow yourself to kick back and relax a little. You do have a year's salary under your belt, and you do have time to enjoy your life before re-entering the workforce. Take your time to figure out what you really want to do for your job. If this takes you a little longer than your severance lasts, that's okay; you could still qualify for unemployment insurance once that money runs out.
Find A New Job
If you're getting itchy feet, or are finding that you're starting to worry as your severance amount dwindles further and further toward $0, there's absolutely no harm in finding a new job. Use the internet to your advantage, look on local job boards, attend job fairs. If you've decided that you're going to change industries completely, search for jobs within those industries. Even if it takes a little longer than expected, that's what your severance is for.
How Did You Spend Your Severance?
Have you ever been laid off from a company that you spent the last two decades working for? Did they offer you a handsome severance? What did you do with it? Let us know in the comments below.
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