In recent months, we’ve seen report after report of companies making major layoffs. It may not happen to you, but if it does, what financial moves should you make?
Before you take any steps, just remember one thing: You don’t need to panic. While getting laid off is certainly not pleasant, it’s also not the end of the world. In fact, many people who go through this experience land on their feet, with jobs as good as or even better than they had before.
Nonetheless, you’ll still want to ensure you make the right decisions during any time you are laid off. Here are a few ideas to consider:
Be prepared. The best time to deal with any financial pressures resulting from a layoff is well before the layoff occurs. That’s why you should maintain an emergency fund to cover at least six months to a years worth of living expenses. You may want to keep these funds in a money market account that offers liquidity and competitive returns. Then, if you do get laid off, you won’t have to rush into selling off your long-term investments.
Protect your 401(k). If you’re laid off, your 401(k) will present you with a tempting target. After all, it’s just sitting there—and it may contain a lot of money. But raiding your 401(k) could be one of the worst mistakes you make. If you do cash it out, you’ll have to pay income taxes on the proceeds, and if you’re under 59 1/2, you also may have to pay a 10 percent premature distribution penalty. And, just as bad, you’ll be depriving yourself of a major source of retirement income. If you’re really cash-strapped, you may be able to take out a loan on your 401(k), but you should take this step only as a last resort. You’ll be better off either keeping your 401(k) in your former employer’s plan, moving it to your existing IRA, or transferring it to a “rollover” IRA, from which you can eventually move it to your new employer’s 401(k).
Consider adjusting your asset mix. If you’ve maintained a diversified portfolio of investments, you’ll be in good shape to make some needed adjustments in case of a layoff. For example, if you have a lot of growth-oriented investments, such as stocks, you may want to think about selling some and then investing the proceeds into income-producing vehicles, such as bonds. That way, you won’t have to deplete all your assets — and once you’re employed again, you can read just your portfolio to match your investment personality, time horizon and long-term goals.
Borrow wisely. If you have to borrow, be smart about it. A loan from a family member or close friend may affect your pride, but it’s less expensive than one offered by a high-interest-rate credit card.
By planning ahead and using your resources wisely, you can almost certainly get through a layoff with your financial future intact. So take the necessary steps—and keep moving forward.
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