What To Do When You Leave Your Job
Four Financial Areas to Address in Every Job Transition
While the weeks following your separation from an employer may be hectic and you may be preoccupied, this is also makes it more important to be aware of the things you need to do. You may be preoccupied with a new job, a move, a job search or any combination of those, but your finances need a little attention at this time too.
1. Budget – Although it’s a great idea to take a week of “me” time and regroup, going on a celebratory spending spree to ring in your new found freedom from your boss probably isn’t the best idea. If you can afford it, go on a reasonably priced vacation where you can relax and reset, and come back ready to tackle whatever is ahead of you.
Hopefully you left voluntarily for another job, but unfortunately in this economy that isn’t always the case. Regardless of your future income outlook, this is a great time to look at your monthly budget to see where you’re at and where you need to be. If you haven’t been following a budget, this could reveal some spending habits you weren’t even aware of. Even if you have been keeping a budget you may need to adjust it, especially if you’re going to be on a job search. If you have lost your income, you really can’t get too conservative here. Trim whatever fat you can and it could save you some serious stress down the road.
Contrary to popular belief, if you’re moving to a position that pays you more it doesn’t mean you need to bump up your lifestyle to meet with your new income. If you were comfortable before, don’t change anything. Save the additional money and work on getting it to work for you in some way.
2. Retirement Accounts – You have a few options for what to do with your 401k savings when you leave your employer. Withdrawing it and catching the first flight to Vegas when you get the check may sound like fun, and it is an option, though probably not the best.
Whatever you do there is one thing you want to keep in mind. Anytime you take a withdraw or distribution from your 401k account you only have 60 days to get that money back in a retirement account to avoid paying income tax (and a 10% penalty if you’re under 59.5 years old).
That said you can do one of three things:
- Keep your account at your current employer until you feel like dealing with it. This option has its appeals because it requires no effort. However, you will have no ability to contribute and while you still get to make decisions in the account you might not have easy access to it like you did before.
The other two options involve rollovers, and have various benefits and drawbacks to consider.
2. Roll over with your new employer. If you have a new employer that offers a 401k you will have the option to roll your previous 401k in to that one once it is set up.
Advantages:
- You can take loans from 401(k) accounts, whereas IRA withdrawals are only available for certain exceptions.
- Keep all your retirement savings in one place.
Disadvantages:
- 401k plans often have higher costs than advisory or self-directed accounts
- Limited investment options compared to IRA
3. Roll over into an IRA. There are many low cost options out there, from self-directed discount brokerage accounts to fee-only advisory accounts. Advantages:
- Often lower cost than a 401k
- Not limited to mutual funds like most 401(k) plans
- Wider range of investment options offers more opportunity for diversification and risk management
- You will have an IRA to contribute to in the event you don’t have a 401k at your next job
- You or your Financial Adviser maintains control of the account regardless of your employment situation. Accounts will be accessible to you, and working with a Financial Adviser can help ease some of the financial stress of your transition. Find out more about fee-only retirement accounts
Disadvantages:
- Loans not available (any distribution prior to age 59.5 has to be returned or rolled over within 60 days to avoid penalty).
3. Company stock – If you have a substantial amount company stock, you might want to reduce your exposure to that company if possible. What you are able to do can be affected by many factors related to your company, plan type, share type, issue/purchase date and more. You will want to consult your financial adviser and CPA on exactly what to do with your shares to avoid any negative tax consequences while diversifying your holdings.
4. Insurance – Healthcare is one of the greatest benefits of having a corporate job. Your insurance coverage will terminate on the same day your employment terminates, and you will have a certain amount of time to elect COBRA coverage. COBRA coverage allows you to keep your current group insurance for a period of time, with the stipulation that you will now have to pay for the full cost of the coverage. Luckily for you, the current administration has extended an offer to help you pay 70?% of your COBRA coverage, keeping your health care costs similar to those under your employer. I suggest you consult whatever documents your employer gives you and also find the current information on the Department of Labor Website.
In addition to healthcare considerations, this is also a good time to to take a look at your life insurance and disability insurance. It’s never fun to think about, but chances are you had a little peace of mind from whatever coverage your employer provided. There are a couple of reasons you may want to re-evaluate here:
- The coverage you were under most likely doesn’t stay with you when you leave.
- Often you may find that even the coverage you were under was insufficient.
- It’s good to address your insurance concerns now since you may not always want to be dependent on company life and disability coverage, and for individual policies the new account requirements (and premiums) will only get more stringent as you get older.
This is not an exhaustive list, but we hope we have addressed some of the main questions people come across when in an employment transition. Please consult with your financial adviser to help you figure out specifically what is best for your situation.
