The most severe job losses may have already happened, but that doesn’t mean more employees won’t be getting “the call” from the human resources department.
The first phase of layoffs hit front-line workers in leisure and hospitality-focused industries such as airlines, hotel, restaurants and retail. Economists say subsequent rounds will spill over to other sectors and could hit the managerial level harder as supply chains catch up and consumers continue to spend less amid concern that COVID-19 will prevent a return to normal economic life for an indefinite period of time. And just because you’re able to work from home, they say, doesn’t mean you’re safe.
“Job losses are still coming — it’s just a little bit delayed due to patriotism and shock,” says Chris Rupkey, chief financial economist at MUFG Union Bank.
So what are some prudent financial steps workers can take now, while they’re still gainfully employed, in anticipation of a job loss, furlough or serious reduction in compensation?
The most basic advice is still the best place to start: Know how much you have and how much you spend. Regarding the former, many people are aware of general amounts in their main accounts, but they tend to forget about things like small retirement plans at former employers. It’s also important to understand what kind of severance your employer offers. If you have a deferred-compensation plan or hold restricted stock units, you need to understand how it’s all administered — and what the tax implications are.
Milo Benningfield, a financial adviser in San Francisco, says those in executive positions may want to get referrals for employment attorneys. When employees find out they’re getting terminated, it’s helpful to have someone who can guide them since those first few moments are often when exit packages are most negotiable.
For spending, advisers say it’s helpful to make a list of necessary expenses and a list of discretionary ones. Be familiar with Congress’s relief legislation, the CARES Act, and how it could affect mortgage, student loan payments and the unemployment benefits you may be entitled to, including the expiration dates of those programs.
Nearly every planner I spoke to emphasized the importance of reviewing discretionary spending — even for wealthy Americans, not-so-insignificant savings can come from cutting back on takeout food and unnecessary subscriptions or memberships while stuck at home.
If you don’t have an emergency liquid fund set up — totaling about six months of living expenses — then now is the time to build it. Jeremy Portnoff, a financial adviser in Irvine, California, suggests clients with at least six months of savings put half the emergency money in longer-term certificates of deposit and the other half in short-term liquid savings.
If you need to create the fund in a short period of time, consider tapping the equity in your home through a cash-out refinance or a home equity line of credit, according to Benningfield.
Another source to establish or add to a reserve fund may be the shorter-term bond holdings of a brokerage account. And while most would be reluctant to lock in losses and sell stock holdings now, remember that the market has rebounded substantially from its low at the end of March.
A last resort to tap for cash is a 401(k) account, but there are caveats. Generally withdrawing money from a 401(k) for those under 59 1/2 comes with a 10% penalty, but the CARES Act waives that penalty for withdrawals up to $100,000 until Dec. 31 for those affected by COVID-19. Employees have three years to repay the loan under the legislation, but if you’re terminated the loan will be treated as taxable income unless you repay.
For those who already have a sufficient emergency fund, then it makes sense to continue with 401(k) contributions, especially if your employer offers a match. However, make sure you know how the plan and match work, including when you have to be there to reap the benefit of the match — like at year-end. While you’re familiarizing yourself with those terms, check your allocations overall and ensure you’re still comfortable with the risk level.
One other thing to keep in mind: If your 401(k) account balance is more than $5,000, you don’t have to take it with you right away. Dave O’Brien, a financial adviser in Richmond, Virginia, says it’s a better idea to wait until you’re ready to roll that money into an IRA, since many employees don’t roll their cash into a new plan immediately and could miss out on some of a market rebound.
Lastly, be sure to take advantage of all the insurance coverage and benefits you’re entitled to while you’re still an employee. Fill prescriptions, schedule telemedicine or regular doctor appointments, and use up money in flexible savings accounts.
Many companies offer estate or financial planning services for nominal fees that would be smart to make use of before getting fired. O’Brien says if your employer pays your dues for a professional association, find out if the association offers options for additional life or disability income insurance through its group insurance.
And finally, remember that many employers offer a match for charitable giving. Even if you’re concerned about your finances, making a donation — that will get doubled — to someone less fortunate could be a nice selfless act on your way out the door.
Leondis writes editorials on taxes and fiscal policy for Bloomberg Opinion.