Where To Get Cash After A Layoff?
If you lose your job due to a layoff, the first thing you generally do is to start cutting expenses while searching for the next one. But if you’re in your late 50s or early 60s, your prospects may be considerably more limited. Although it’s illegal for employers to discriminate because of age, the fact is that many older workers find it more difficult to get new jobs. Not only can the process take much longer, the new job often turns out to be lower-paying. Even if you qualify for unemployment insurance, you might find yourself needing to start spending your retirement savings or start taking Social Security (SS) in order to meet expenses. Making the wrong financial choices under these circumstances can have a big impact on your future retirement goals. Here are some recommendations about the order in which you should start tapping into your various sources of retirement funds after an unexpected layoff propels you into a premature (if temporary) retirement.
Let’s suppose that you hold your savings in several different types of accounts:
- A 401(k) at the company from which you were laid off
- A traditional IRA account
- A Roth IRA account
- A brokerage account
The first consideration is to avoid having to pay penalties. If you are under age 59 ½, you’ll have to pay an extra 10% on all withdrawals from your IRA account. So that’s not a good choice. But if you are older than age 55, you can withdraw from the 401(k) without penalty. You can also withdraw the contributions you made to your Roth account without incurring any penalties. But not the earnings. The good news is that any withdrawals made from a Roth account are assumed to come first from contributions. So that could also be a good choice at least as far as avoiding penalties.
Another possibility exists if you have not yet been laid-off (but anticipate it coming). You might have the option of taking out a loan from the 401(k). Although most plans require you to pay off any loans after you leave the company, some allow you to maintain the loan post-separation. The benefit is that you wouldn’t be using up the retirement funds, you’d be paying yourself back with interest. But of course that assumes that you have other sources of savings that can be used to pay back the loan.
The next consideration is taxes. Withdrawals of contributions from a Roth are tax-free as well as penalty-free as described above. But you’d be losing out on future tax-free growth by reducing the size of the account so early during your retirement. A better alternative might be to sell some of the mutual funds or stocks in your brokerage account. Any long term capital gains on your asset sales will be tax free if your taxable income is lower than $18,450 (married filing jointly), which could be the case if you are out of work.
If you are age 62 or older, you have a few more choices. Although there are no more penalties on IRA or 401(k) withdrawals, you’ll still need to pay taxes on them. But now you have the ability to start SS. Despite the allure of getting that monthly check from the Social Security Administration, I would not recommend starting so early. Claiming SS at age 62 means your monthly benefit will be 25% less than it would have been had you waited until you reached your full retirement age of 66 or 67. And by waiting until age 70, you’ll get another 32% on top of that. No other investment will provide anything close to that kind of return.
If you own a home, a reverse mortgage becomes another option when you’re over 62. Although reverse mortgages have gotten some bad press in the past, they are much more strongly regulated now and can be a viable option for unlocking the equity in your home to use as needed. Here’s some more information about them: https://www.cognizantwealth.com/2014/02/20/reverse-mortgages-the-good-and-the-bad/
As an alternative to a reverse mortgage (which is debt against your home), there are also companies that will buy a portion of your home’s equity. This is a much less regulated area of the market, however, so you have to be very careful to read all the fine print in the contract.
Which of the above choices are best for you depends on the specifics of your financial situation as well as your future retirement and other goals. Probably the best decision you can make right now is to put together a retirement plan prior to any job change. You’ll be better prepared to deal with the consequences and make those choices that will maximize the likelihood of your future success.