Losing your job is never easy, but being laid off close to retirement can feel particularly stressful. Suddenly, the plans you had carefully crafted for your golden years are thrown into disarray.
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When you’re younger and have years to go before retiring, it’s much easier to catch up on savings. You don’t have this luxury the closer you get to retirement. Not only do you have to deal with the immediate loss of income, you now need to consider your longer-term savings plan.
As a certified financial planner, I always recommend sitting down and creating a plan before making any moves. It’s important to remember that this setback doesn’t have to derail your retirement dreams completely. With the right approach, you can navigate this situation successfully.
Here are six things you should do if you get laid off near retirement.
1. Take Stock of Your Situation
Start by taking a close look at your current finances. Calculate your current savings, investments and any other sources of income you may have. Determine how long your savings will last without any additional income.
This will give you a better understanding of where you stand and provide a clearer picture of what you need to do next.
Once you have a grasp of your situation, it’s crucial to create a detailed budget. This will help you track your expenses and identify areas where you can cut back. Prioritize essential expenses such as housing, food, healthcare and utilities. Review your discretionary spending and see where you can cut back temporarily to stretch your funds further.
2. Review Your Retirement Plan
Being laid off near retirement may require adjustments to your retirement plan.
Consider whether you need to adjust your target retirement age or make changes to your investment strategy. If you were planning to retire soon, you might need to extend your working years to build up your savings. This largely depends on your situation, your goals and how much you have saved.
If you have a pension plan through your former employer, take the time to understand your options. Some plans allow for lump-sum distributions, while others provide monthly payments. Consider consulting with a financial advisor to evaluate which option aligns best with your retirement goals.
If you were planning to rely on Social Security as part of your retirement income, you’ll also want to get an updated estimate of your benefits. Changes in your employment status may affect the amount you’re eligible to receive.
3. Tap Into Your Emergency Fund — But Avoid Your Retirement Savings
If you have an emergency fund, now is the time to use it. These funds are designed to help you weather unexpected financial storms, and a layoff certainly qualifies as one.
But be cautious when withdrawing from your emergency fund, and use it judiciously. Consider only using what is necessary to cover your immediate expenses while keeping some funds aside for unforeseen emergencies that may arise during your job search.
It may be tempting to avoid tapping your retirement savings account to cover your daily expenses. If possible, it’s best to avoid this.
Generally, withdrawing from traditional retirement accounts like 401(k)s or traditional IRAs before the age of 59½ incurs a 10% early withdrawal penalty on top of regular income taxes. This means that a significant portion of your withdrawal will be subject to taxes, reducing the amount you receive.
But there are some exceptions, like if you withdraw money for medical expenses, purchase a first home, or pay for certain educational expenses. Roth IRAs especially offer more withdrawal flexibility since contributions have already been taxed and can be withdrawn penalty-free, although earnings may still be subject to tax.
4. Understand Your Severance Package
If you receive a severance package from your employer, review it. Calculate the amount you’ll receive, and consider how it fits into your overall financial plan. Adding your severance to your asset inventory will provide a clearer picture of your financial situation.
Losing your job often means losing your employer-sponsored health insurance. Research your options for continued coverage, such as COBRA or individual health insurance plans. If you’re over age 65, you may qualify for Medicare.
You’ll also want to start looking into the unemployment benefits available to you. Each state has different eligibility criteria and benefit amounts, so make sure to understand what you’re entitled to. Unemployment benefits can provide temporary financial assistance while you look for a new job.
5. Decide If You Want To Go Back To Work
Take some time to reflect on whether you want (or need) to continue working or if you’re able to retire.
If your savings and income can comfortably support your desired retirement lifestyle, early retirement might be feasible. However, if your financial resources fall short or you’re uncertain about the future, it may be smart to explore finding a new job that can provide additional income and stability.
Going back to work doesn’t always mean finding a new full-time job. You may want to consider part-time or freelance work that aligns with your skills and interests. You could also consider starting a small business or monetizing a hobby. By generating additional income, you can ease the financial strain and provide yourself with more financial flexibility.
6. Take Care of Yourself
While this is a difficult time, you need to take care of yourself both physically and emotionally. Losing a job can be stressful, and it’s important to prioritize your well-being.
Make sure to get enough rest, eat well, exercise regularly and seek support from friends and family. Taking care of your mental and physical health will help you stay focused and motivated during your job search.
Remember, being laid off near retirement doesn’t mean your retirement dreams are shattered. By taking stock of your situation and making a solid game plan, you can regain control and set yourself up for a successful retirement.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: Here Are 6 Things You Should Do If You’re Laid Off Near Retirement
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