What To Do With Your Investments After a Layoff
August 25, 2014
If you’ve been laid off, but you were working with your previous employer for number of years, you probably accumulated a good chunk of money in your employer-sponsored retirement plan. And hopefully, you’ve also got some promising investments outside of your retirement plan. When you lose your job, and the search for ways to pay the bills is on, all options are on the table – including your investments.
There’s no question about it, a layoff forces some tough choices when it comes to your investments. You have to make choices about current needs versus long-term savings plans. In light of that, what should you do with your investments after a layoff?
1. Leave Tax-Sheltered Plans Alone!
Tax-sheltered retirement plans are often tapped following a layoff. And if there is very little in the way of savings outside of a retirement plan, this usually happens pretty early in the process. But this is fundamentally one of the worst post-layoff moves you can make.
Consider the complications of withdrawing money from your retirement plan:
- You will be using money that is invested for long-term needs to pay current bills
- You will be reducing the money that will be available for retirement – and the investment income it will earn
- By making an early withrawal, you will not only have to pay income tax on the money – both federal and state – but you will also be subject to the IRS 10% penalty tax on early withdrawals; this will increase your income tax bill at a time of reduced income
- Like everything else in life, success in retirement saving is largely about momentum; by withdrawing money from your plan well before retirement, you may lose that momentum – maybe even forever!
Tax-sheltered retirement plans should be the last piggybank that you break open in the event of a layoff. And even then, it should be done only in emergency situations.
2. Shift to More Conservative Assets
A layoff is an excellent time to shift your investments into more conservative assets. Sure, you may be giving up potential investment income, but the potential losses you could face will more than compensate for it.
Here’s the thing – when you don’t have a steady paycheck, you can’t afford to take big losses in your investments. You won’t be in a position to put more money into your investments to cover for the losses. What income you do have will need to be used to pay bills for survival.
You’ve heard the saying when it rains, it pours; the loss of your income makes you vulnerable to other catastrophes. By shifting your investments into more conservative assets, you reduce the likelihood of a sudden, substantial drop in value.
Having a solid income is one of the best ways to diversify against investment market risk. If you don’t have that income anymore, you need to get as close to a risk-free position as possible in your portfolio. This is true in your retirement portfolio, but even more so for your non-retirement portfolio. You’ll need to keep that money available for whatever might come up.
3. Resist the Urge to Gamble with Your Money
A layoff sometimes creates the desire to “make up for lost income” through your investments. That might include taking a chance in the stock market, or even with commodities, in an attempt to make up for the investment and retirement contributions that you’re not making as a result of your job loss.
For all the reasons stated above, you need to avoid taking chances with your savings and investments. It’s almost a cosmic reality, but when you lose a job you are more vulnerable to other financial setbacks. By avoiding high-risk investments, you can at least eliminate one potential source of financial trouble.
4. Keep Your Liquid Assets Handy
Conservation of liquid assets will be absolutely essential in dealing with life after a layoff. You’ll have to resign yourself to the fact that any liquid assets that you have will be fair game in paying for basic living expenses.
Liquid assets include cash-type investments, including certificates of deposit, treasury bills, money market accounts, and savings and checking accounts. In fact they can include any investment asset that is not either sitting in a retirement plan, or invested in equities or mutual funds through a non-retirement account.
You need to do the best that you can to preserve these assets, but you’ll also have to create a budget. The worst thing you can do is to draw down your liquid assets within a couple of months after your layoff. You have to do your best to parcel them out, a little bit at a time, so that they can act as a supplement to whatever reduced income you have for as long as possible.
One of the worst uses for liquid assets is using them to pay off debt. The intention is good – by paying off the debt, you also eliminate a monthly payment. The problem comes in that the loan balance you’re paying off is usually many times higher than the monthly payment you’re taking out. For this reason, a layoff is not a good time to begin paying off debt. Sure, it will enable you to lower your monthly expenses, but it will also deny you the use much-needed liquid assets, and often force you to borrow more money at a later date.
What advice do you have on how to handle your investments after a layoff? Leave a comment!
All posts by Kevin Mercadante