Laid Off With a Severance Package? Here’s How to Make a Plan
Gathering all the relevant information and staying organized is key, as is getting your financial team involved. Here are five financial planning tips to help.


There’s been a slew of layoffs recently. Google, Amazon, Salesforce and Microsoft all announced layoffs. Some are offering severance packages to help their former employees with the transition. If you are facing a layoff and offered a severance, proceed carefully — the decisions you make are important.
Here, to help get you started, are five financial planning tips to help you get the most out of a severance package.

1. Get Organized!
Usually, there is a flurry of forms, booklets and deadlines that comes with a severance package. Gathering all the relevant information and staying organized is key. Make sure you have all the information for each type of company plan you own — deferred compensation, stock awards and options and the 401(k), for instance — this will help with planning. It’s best to check with the human resources department or the plan administrator for the rules on each plan.

2. Share the Information With Your Team.
Clue in your accountant and financial adviser of what’s happening. Your accountant and/or financial adviser can run tax projections to ensure you withhold enough in taxes. A financial adviser with expertise in corporate plans can help you navigate pension elections, deferred compensation choices and what do to with your stock options/restricted stock. Ideally, your accountant and financial adviser should have a call to discuss timing of income and taxes and share ideas.

3. Make a Plan for the Money.
First, ensure you have an emergency fund set up or use the severance pay to get one started. I usually recommend having enough to cover three to six months of personal bills in readily available cash or money markets. A little extra cash helps if you need it for additional income taxes.
If you already have an emergency fund and are comfortable with your cash flow or career prospects, then you’ll want to evaluate other ways to use the severance money, like topping off the 401(k) while you’re still eligible or maxing out a health savings account.
Older, more conservative workers may want to leave the severance pay in cash or pay down debt. Younger workers can consider keeping the money in cash then fund college savings plans when they secure their next job. Only a thorough review of your cash flow, goals and objectives can really determine the best use of the money.

4. Get the Timing Right.
It’s important to review the timing of severance pay with other company plans. Other company plans may pay out in the year you terminate employment. Deferred compensation plans typically distribute funds in the year of termination or the year of termination plus six months. That income plus the severance pay or a bonus you received already could put you in a higher tax bracket.
If that’s the case, ask about delaying the deferred compensation pay. Some clients will stretch the payments over several years to create a steady source of income. This can also spread the income tax liability over several years instead of bunching into one year.
Be careful, though: With deferred compensation, you are an unsecured creditor of the firm — if the company goes belly up, they can use those assets to satisfy creditors.
Also, think about the timing of exercising stock options. If the company stock price is currently down, perhaps staggering exercising options over multiple years makes sense. This way, you give the share price time to hopefully bounce back. Staggering the exercise of options also spreads the tax liability out over multiple years, which may prevent you from creeping up into the next tax bracket in one single year. Finally, with stock options, be aware of the expiration date: You don’t want to forfeit any options.
If you have pension, first be aware of any deadline to decide on your options. Some employers may offer a lump-sum buyout. You’ll want to review that offer with an experienced professional and consider the effect interest rates may have on your offer. It’s best to start with gathering the pension booklet, requesting a quote and discussing your choices with your team.
Finally, if you have more income coming in this year, then explore more advanced tax planning. If you are charitably inclined, this may be the year to accelerate contributions to a donor advised fund. Or if you have consulting or other self-employed income, then setting up your own employer retirement plan may make sense.

5. Evaluate Group Insurances.
Group insurances like life, health and disability are important for your personal financial planning. Employer group life and disability insurance may be portable — you can take it with you if you leave, but usually not at the group rate — it may cost more. Try paying for those insurances monthly instead of annually, until you can attain coverage through a new employer or purchase your own policy elsewhere. I usually recommend clients purchase their life and disability insurance privately so their coverage is not dependent on employment. In some cases, it is cheaper to purchase insurance outside of the group plan.
A severance may include provisions for health insurance. If not, COBRA or a private plan are options. It’s wise to price out a private plan to compare to the company’s plan. I have found the employer plan is not always the best and cheapest coverage.
Putting It All Together
Losing a job is a difficult time, and your head may be spinning in 10 different directions as you try to sort it all out. If you are offered a severance package, proceed carefully and thoughtfully.
Stay organized, gather up all the company booklets on each plan and discuss with your friends, family, colleagues, human resources and your financial team. You have one shot to get the most of out of a severance package, so you’ll want to get it right the first time.
--
Michael Aloi is a Certified Financial Planner with 22 years of experience. For more information or a complimentary review of your pension options, please feel free to send him an email at maloi@sfr1.com
Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC. With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.
-
The Seven Best-Paying Side Gigs For Retirees
If you're worried you won't have enough saved for a comfortable retirement, or that life after work will be boring, these well-paid roles could be the answer.
-
$40,000 CD vs $40,000 High-Yield Savings Account - 3 Things Savers Should Consider Now
Both options offer risk-free methods to grow your savings. Learn how much you can earn with each, how they differ and which one suits you best.
-
Gray Divorce Can Throw Your Retirement a Curveball: What to Know
If you're entering retirement and going through a divorce at the same time, you've got some work to do to shore up your long-term financial security.
-
I'm a Real Estate Investing Expert: Optional 721 UPREIT DSTs Can Be the Best of Both Worlds
Before investing in any 721 UPREIT exchange, look for one that offers a straightforward, investor-friendly exit.
-
How an Expired Passport Thwarted Blackmail (and What Other Important Documents You Should Keep)
An optometrist produced his expired passport to foil a blackmail attempt by the daughter of a former employee. After proving he was out of the country on the date of a forged diary entry, he took it a step further.
-
Optimize, Grow, Retain: The Power of Annual Client Reviews
Financial advisers can use annual reviews to help enhance client outcomes, strengthen relationships and build their practice.
-
I'm a Real Estate Investing Pro: This Is What Investors Should Know About Truck Stop Investments
Truck stops might seem like good investments, but they can actually be a risky gamble due to unstable fuel prices, unreliable operators and coming changes in transportation. Instead, consider safer options like industrial or residential properties.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms
Standard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams Now
Beyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on Retirement
While some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.