The coronavirus is having a big impact on many industries — energy, airlines and hospitality, just to name a few. While President Trump and Congress are working to help provide resources and support programs to those without a financial safety net, plenty of higher- paid corporate managers and executives may also lose their jobs in the coming weeks and face financial uncertainty.
If your job is eliminated, you may need to make several personal and financial decisions quickly, which can be stressful. Here is a quick guide on how to be prepared and how to make these decisions:
What to Do with Your Severance Pay
The amount you may receive will vary by company, your position and years of service. This can be a wide range. In the past we’ve seen anywhere from two weeks to two years of salary for those with senior positions or decades of service. However, with company financial budgets uncertain, the upper range of severance pay seems less plausible right now.
If you do receive severance in the form of a lump sum payment, it can immediately feel like a windfall. But it can quickly disappear without a plan. People should draw up a monthly budget and then consider these variables: How long could it take to get another similar paying job? Do I have enough to pay my mortgage and other debts for several months?
If your cash flow is comfortable, with the stock market down from last month’s highs, now could be a good time to invest some of your severance for long-term goals such as a child’s college education or your retirement. However, if you were planning to retire in the next few years anyway, a better plan may be to keep the severance payment in a bank account or fixed income portfolio.
How about Those Stock Options?
For longtime corporate executives and managers, their company’s stock may be their most lucrative asset. Many executives have amassed thousands of stock options or shares of restricted stock, planning to use these funds for retirement.
Unfortunately, the stock market drop during the past few weeks means many executives have seen the value of their company stock decline sharply. An executive with 10,000 shares valued at $40 per share in January may have watched that amount plummet by 25% or more in the last few weeks. If you receive news that you will soon be laid off, determine how long you have to exercise your stock options, and what stock awards you’ll forfeit. Keeping the stock options until the market rebounds will make sense, if your severance plan rules allow an extended period of time to exercise.
Consider Pumping More into Your 401(k)
Before a person making a high income loses their job, assuming they have adequate cash reserves in the bank, they should attempt to contribute the maximum amount from their remaining paychecks to their 401(k) plan. The maximum amount a person can contribute in 2020 is $19,500 for people under 50 years old and $26,000 for those 50 and older.
There are a couple of reasons for this strategy. Depending upon the amount of severance pay or forced liquidation of non-qualified retirement plans, this extra income could move you into a higher tax bracket. Plus, if you get another job this year, you could find your 2020 income is higher than 2019.
So, pouring as much money as possible into a 401(k) can help reduce the tax burden for 2020. In many cases, a company will not allow severance to be contributed into the 401(k) plan, so this is one decision that must be made quickly. In addition, the amount of money withheld from the severance pay may not cover your full 2020 tax liability on that money, so plan to set some aside for taxes.
You must also decide if you want to keep your 401(k) account in the company plan or roll it over into an individual retirement account. Executives with after-tax money in their 401(k) plan have an opportunity to move some of this money to a tax-free Roth IRA.
Take Several Days to Weigh Your Pension Plan Decision
While many corporations discontinued pensions long ago, some Fortune 500 companies and other employers still have them. Deciding to take a lump sum or a monthly annuity as part of the pension could be the most important decision you make during this critical period.
Each person has different needs. Some people who are married, in good health and between ages 55-65 elect the monthly annuity since it provides them a stable income for their lifetime. However, most pension plans don’t adjust for inflation, so that’s a major drawback of the monthly pension. Those with significant assets, stock or deferred compensation plans that will be paying out over multiple years may want to elect the lump sum option (if available) and roll it to an IRA, deferring the taxes.
A word of caution — try to set aside the current economic and health care uncertainty when making this decision that will have an impact on your finances over multiple decades. Instead, make a list of the pros and cons of each payout option for you and your family, and revisit this list multiple times, on different days, before signing your pension paperwork. Seek professional advice for an independent second opinion.
Other Considerations for Corporate Executives
Many executives also face decisions on how to manage immediate payouts of deferred compensation, how to replace company-paid medical benefits, as well as life and disability insurance. Others may have just bought a larger house or a second home, and now face decisions on whether to refinance the mortgage — or mortgages — on these properties.
A financial adviser can help develop a strategy to maximize annual income, minimize taxes and manage the value of long-term investments. For executives nearing retirement, the income strategy often involves determining a start date to begin drawing Social Security, as well as withdrawal strategies from their 401(k) accounts, stock plan and pension incomes.
For many people who lose a job in the next few months, clearly weighing all options can help prepare them to ride out this unusual period. The goal is to make the best decisions now to manage your wealth, enabling you to concentrate on your next venture when the U.S. and global economies return to normal.
Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth (opens in new tab) in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
Stock Market Today: Stocks Climb After Tesla Earnings, GDP
The electric vehicle maker reported record profit and revenue for the fourth quarter.
By Karee Venema • Published
Home Prices Declined the Most in These 10 U.S. Cities in 2022
Home prices fell by amounts not seen in years in several major metro areas.
By Ben Demers • Published
A Financial Review in Early 2023 Can Optimize Your Strategy
Look to build savings, reduce risk, minimize taxes and ensure a successful retirement by reviewing your budget, contributions, allocations and beneficiaries.
By Ken Nuss • Published
Want to Increase Income? Focusing on 5 Elements Can Help
There are multiple ways to generate income, but to make your money work for you, consider sustainability, maximizing, automation, reinvestment and tax efficiency.
By Jamie P. Hopkins, Esq., CFP, RICP • Published
Are Annuities Good Investments? Weighing the Pros and Cons
Love ’em or loathe ’em, annuities can be a smart investment tool for the right person under the right circumstances.
By Nate Miller, Investment Adviser Representative • Published
6 Questions Your Financial Adviser Should be Asking
To effectively help you with your retirement strategy, a retirement professional must get a clear picture of what you have and what you need.
By Tyler Hill, Investment Adviser Representative • Published
Financial Planning Should Be Intergenerational
Overcoming the unspoken rule that money is too taboo a topic to discuss among family members is important going forward. The reality is that families, at some point, will need to be on the same page about wealth planning.
By Aditi Javeri Gokhale • Published
In Retirement Planning, What’s Your Retirement Personality?
There are many ways to think about retirement planning, and your personality can influence yours. If your personality and plan match, you have a greater chance of retirement success.
By Samuel V. Gaeta, CFP® • Published
Inflation’s Toll: Cuts to Retirement Savings and Health Care
Many consumers struggling to make ends meet amid inflation are reducing retirement planning and health care, both of which can have disastrous results later in life. A professional could help.
By Kristi Martin Rodriguez • Published
Considering a Roth IRA Conversion? 6 Reasons It Makes Sense
Avoiding possibly higher taxes in retirement, having no RMDs and the markets being lower are just three reasons to switch to a Roth IRA.
By Kevin Webb, CFP® • Published