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It is never easy to face the uncertainty of a layoff or early retirement offer. Whether it is something you have been anticipating or a complete surprise, that first wave of panic can make it hard to think clearly. Suddenly, the steady paycheck that once anchored your life is gone, and a thousand questions start rushing in: What now? How long can I get by? Should I take the severance?
No matter how prepared you are for this “qualifying life event,” it can be stressful. Here are a few key areas to concentrate on when crafting your own plan.
1. Understand What Your Severance Really Means
A severance package may sound like a financial cushion, but it is not always as generous as it looks. Because severance is considered W-2 income, it is taxed like a bonus, often at a higher withholding rate. That means a $20,000 check could shrink to $11,000 or less after taxes and deductions.
Before you sign anything, calculate what your net payout will actually be. If your employer offers options for how it is paid, such as all at once or over time, consider how that will affect your tax bracket for the year. Sometimes taking less up front saves you more in the long run.
2. Rethink Health Insurance Before Choosing COBRA
When you leave your job, your employer-sponsored health coverage ends too. Many people default to COBRA because it seems like the easiest path, but that convenience can come with a steep price. Under COBRA, you pay the full cost of your plan.
Instead, review your other options early. Explore state health exchange plans or coverage through a spouse’s employer. Knowing your costs ahead of time helps you avoid expensive gaps in coverage or sudden sticker shock.
3. Know When to Start Social Security
If you are nearing retirement age, one of the biggest questions is when to start collecting Social Security. Waiting until full retirement age increases your monthly benefit. But delaying it is not always the best financial move. Odds are, if you’re no longer working, you should consider collecting. Otherwise, you may end up shrinking your retirement nest egg while waiting for a bigger Social Security benefit.
4. Be Careful with 401(k) Withdrawals
It is tempting to tap into your retirement savings to bridge the gap but doing so before age 59½ usually triggers a 10 percent penalty on top of income taxes.
If you are 55 or older and leave your employer, there is a special provision that allows withdrawals from your current 401(k) without penalty, but only under strict conditions. Consult a qualified professional before making any moves. The wrong decision could cost you thousands.
5. Get Professional Guidance Before Panic Takes Over
When stress is high, tunnel vision sets in. This might be time to call in for reinforcements. A professional can help you model different scenarios, manage taxes, and make informed choices while emotions are running high.
Related: Retirement Offer on the Table? The Hidden Tax Traps and Timing Decisions You Can’t Afford To Miss