Retirement Planning After Losing Your Job

Nobody is ever truly prepared to lose their job. It can feel like the rug was pulled out from under you—leaving you with emotional and financial chaos to handle. Unfortunately, it can impact your retirement plan significantly, especially if you’re close to the end of your career. While this can certainly be a setback, there are strategies you can use to protect your hard work and stay on track toward your goals.

In this article, you’ll learn how job loss can impact your retirement plan and the steps you can take to minimize the impact. This includes assessing your current situation, managing your retirement savings accounts, and adjusting your plan, if necessary. You’ll also learn how a financial advisor can provide guidance and clarity to keep you on the right path.

How Losing Your Job Affects Your Retirement Plan

Losing your job creates both emotional stress and financial uncertainty. Without a steady paycheck to rely on, your monthly budget, savings habits, and retirement plan can all feel a significant strain.

“Losing a job can halt retirement contributions, which can force early withdrawals, or can disrupt compounding growth,” says Michael Santiago, CRPC^™, Senior Financial Editor at RetireGuide.com. Years of incremental saving and planning for retirement see an immediate pause, which may leave you to make tough choices, like tapping into your retirement accounts. This has notable consequences, however, such as an early withdrawal penalty and an opportunity cost for long-term growth.

Additionally, if you had an employer-sponsored retirement plan at your previous job, you must decide what to do with it. Typically, this means either rolling it over into a new employer’s 401(k) plan (if available) or into an Individual Retirement Account (IRA).

The stage of life you’re in when you lose your job is also critical. You generally have more time to recover and rebuild your savings in your career’s early to middle stages (20s-40s). However, if you’re closer to retirement, you may “face difficulty with adjusting timelines or strategies,” Santiago adds.

Assessing Your Current Situation

While it may be challenging, take some time to assess your current financial situation if you become unemployed. This includes looking at key elements like your career path, monthly budget, and additional income sources. By evaluating these aspects, you’ll be able to make informed decisions on how to proceed and communicate with a financial advisor more effectively.

Below is a breakdown of various areas of your finances you may need to evaluate:

1. Income and Cash Flow

Job loss can cause you to lose some or all of your monthly income in the blink of an eye. For this reason, it’s vital to consider additional sources (side hustle, dividends, rental income, etc.) or your options to improve your cash flow in the short term.

Chad Harmer, CIM, MBA, FCSI, founder and financial planner at Harmer Wealth Management, explains that it’s crucial to “assess immediate cash flow needs and create a short-term financial plan to avoid unnecessary withdrawals from retirement accounts.” He also says if you can, “securing new employment or temporary work can reduce the pressure to draw from investments.”

Some companies offer a severance package when employees are laid off. Alternatively, you may explore government unemployment benefits. Typically, the latter is available at the state level (while adhering to federal regulations) and requires you to:

• Make a certain amount of money during a set period.
• Be unemployed through no fault of your own.

If you’re no longer employed and eligible for Social Security payments, that’s also an option. However, be aware that if you begin receiving benefits early on, it can cut into the size of your payments. Be sure to speak with a financial advisor beforehand to ensure you’re making the right choice.

2. Insurance

If you’ve been receiving insurance from your employer, such as health, dental, and vision, you’ll have to secure new coverage elsewhere. The following are a few different options to consider:

• Join your spouse’s plan. If your partner has a plan through their employer, you can typically join it to avoid paying out of pocket.
• Find a policy on your state’s healthcare exchange.
• Enroll with an HMO or PPO directly.
• Get continued coverage with COBRA. If you choose, you can continue your employer’s coverage with this option.

3. Emergency Fund and Savings

Another important consideration is your emergency fund and built-up savings. Be sure to note how much you have in each of your accounts. If you end up unemployed for a significant period, you may need to tap into these to pay for living expenses until you can secure regular income.

Also, be aware that while it’s possible to access your retirement accounts early, there are serious lasting consequences. For example, if you withdraw funds from your Roth IRA before you turn 59.5 years old, you’ll incur a 10% penalty. Additionally, you’ll lose out on the compound interest and growth you would’ve earned with that money still in the account.

4. Retirement Timeline

Finally, it’s key to evaluate where you are regarding retirement. That is, how long do you have until you reach your goal and what have you built so far? If you’re only a couple of years from the end of your career, for instance, you’ll need to consider whether it makes sense to retire early or return to work. However, if you have several years to go, you’ll likely need to re-enter the workforce and continue saving.

Managing Your Retirement Savings Accounts

After you lose a job, you’ll no longer be able to reap the benefits of your employer’s retirement program, such as a 401(k) or SIMPLE IRA. Because of this, you’ll have to decide what to do with the funds in that account. Typically, you have three options:

1. Leaving it as is. This may be an option if you’re already nearing retirement and are about to be ready to take distributions.
2. Rolling it into a new employer-sponsored plan. Here, you would roll your previous plan into a future employer’s program. However, this may not be an option if they don’t provide a similar plan.
3. Establishing and rolling it into an IRA. You may also roll your past job’s 401(k) into a traditional or Roth IRA, allowing you to continue contributing and growing your funds until retirement.

Mike Kern, CPA, founder of FreeBudget, cautions that the “biggest mistake” regarding retirement planning when you lose your job is “forgetting about your contributions that were on auto-pilot with your employer.” As mentioned above, you can mitigate this by “setting them up with another employer sponsored 401(k) plan or an IRA so that you don’t stop your contributions and ultimately have a damaging effect on your retirement savings,” he continues.

How a Financial Advisor Can Help You Recover

During this period of uncertainty, you must know where to turn to ensure you get your retirement plan back on track. The help of a financial advisor can be an invaluable resource to steer you in the right direction. Whether it means rebalancing your portfolio, budgeting, or managing income sources, a professional is a great help.

“It’s important to emphasize that while a job loss can feel like a significant setback, having a well-structured financial plan with flexibility for disruptions is key to maintaining financial stability,” says Harmer. To help with this, he adds that an advisor can “provide a comprehensive analysis of the individual’s financial situation, focusing on cash flow, investment allocation, and long-term retirement goals,” as well as “recommend a portfolio rebalance to reduce risk or enhance growth potential based on the new timeline and financial needs.”

Working with a professional can also help reduce or avoid “costly emotional decisions,” such as withdrawing retirement savings unnecessarily or taking Social Security too early, says Harmer. A high-quality expert you trust should be able to provide objective, actionable advice to keep you moving in the right direction.

When you work with a professional, find someone you trust who follows the fiduciary duty. If you don’t have an advisor yet, we recommend using this free matching tool to find the right fit. After a brief set of questions regarding your goals and current situation, it’ll present you with a vetted option in your area.