Losing your job is never easy, but being laid off as you approach retirement can be particularly stressful. Suddenly, the plans you had carefully made for your golden years are upended.
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When you’re younger and have years left before retirement, it’s much easier to catch up on your savings. The closer you get to retirement, the more you don’t have this luxury. Not only do you have to deal with an immediate loss of income, but you now have to think about your long-term savings plan.
As a certified financial planner, I always recommend sitting down and creating a plan before taking any action. It’s important to remember that this setback doesn’t have to completely derail your retirement dreams. With the right approach, you can handle this situation successfully.
Here are six things you should do if you’re laid off as you approach retirement.
1. Take stock of your situation
Start by taking a close look at your current finances. Calculate your current savings, investments and any other sources of income you may have. Determine how long your savings will last without any additional income.
This will help you better understand where you stand and give you a clearer idea of what you need to do next.
Once you understand your situation, it is crucial to create a detailed budget. This will help you track your spending and identify areas where you can cut back. Prioritize essential expenses such as housing, food, healthcare and utilities. Review your discretionary spending and see where you can temporarily cut back to further optimize your funds.
2. Review your retirement plan
Being laid off as you approach retirement may require adjustments to your retirement plan.
Determine whether you need to adjust your target retirement age or change your investment strategy. If you’re planning to retire soon, you may need to extend your working years to build up your savings. This largely depends on your situation, your goals and how much you have saved.
If you have a retirement plan with your former employer, take the time to understand your options. Some plans allow lump sum distributions, while others provide monthly payments. Consider consulting a financial advisor to evaluate which option best fits your retirement goals.
If you plan to rely on Social Security as part of your retirement income, you’ll also want to get an updated estimate of your benefits. Changes in your employment situation may affect the amount you are entitled to.
3. Dip into your emergency fund – but avoid your retirement savings
If you have an emergency fund, now is the time to use it. These funds are designed to help you weather unexpected financial storms, and a layoff is certainly one of them.
But be careful when withdrawing from your emergency fund and use it wisely. Consider using only what is necessary to cover your immediate expenses while keeping funds aside for unforeseen emergencies that may arise during your job search.
It can be tempting to avoid tapping into your retirement savings account to cover everyday expenses. If possible, it is best to avoid this.
Generally, withdrawing from traditional retirement accounts like 401(k)s or traditional IRAs before age 59½ carries a 10% early withdrawal penalty in addition to regular income taxes. This means that a significant portion of your withdrawal will be subject to taxes, reducing the amount you receive.
But there are some exceptions, such as if you’re withdrawing money for medical expenses, buying a first home, or paying for certain education expenses. Roth IRAs in particular offer more withdrawal flexibility since contributions have already been taxed and can be withdrawn without penalty, although earnings may still be taxable.
4. Understand your severance package
If you receive severance pay from your employer, review it. Calculate the amount you will receive and think about how it fits into your overall financial plan. Adding your severance package to your asset inventory will give you a clearer picture of your financial situation.
Losing your job often means losing your employer-sponsored health insurance. Research your continued coverage options, such as COBRA or individual health insurance plans. If you are over 65, you may be eligible for Medicare.
You will also want to start looking into the unemployment benefits available to you. Each state has different eligibility requirements and benefit amounts, so make sure you understand what you’re entitled to. Unemployment benefits can provide temporary financial help while you look for a new job.
5. Decide if you want to return to work
Take some time to think about whether you want (or need) to continue working or whether you are able to retire.
If your savings and income can comfortably support the retirement lifestyle you want, retiring early might be feasible. However, if your financial resources are insufficient or you are uncertain about the future, it may be wise to consider finding a new job that can provide additional income and stability.
Returning to work doesn’t always mean finding a new full-time job. You may want to consider part-time or freelance work that matches your skills and interests. You may also consider starting a small business or monetizing a hobby. By generating additional income, you can ease financial pressure and give yourself greater financial flexibility.
6. Take care of yourself
Although this is a difficult time, you need to take care of yourself, both physically and emotionally. Losing a job can be stressful and it’s important to prioritize your well-being.
Make sure you get enough rest, eat well, exercise regularly, and seek support from friends and family. Taking care of your mental and physical health will help you stay focused and motivated during your job search.
Remember, being laid off as you approach retirement doesn’t mean your retirement dreams are shattered. By taking stock of your situation and developing a solid action plan, you can regain control and prepare for a successful retirement.
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This article was originally published on GOBankingRates.com: I’m a Financial Advisor: Here Are 6 Things You Should Do If You’re Laid Off Near Retirement