By Heather Castle
Source: Birmingham Business Journal
With the news of the bankruptcy filing and the recent layoffs at Walter Energy and other companies, I am finding many employees have questions about how to manage financially after a lay-off.
My father, a third generation coal miner, recently retired from the Walter Energy (NYSE: WLT) after 25 years of service.
I have seen firsthand the long hours and tough work that men and women dedicate to the mining industry. For anyone who has ever experienced a layoff, you understand the uncertainty and fear that often arises. Here are three tips to help reduce fear and manage financially in times of transition:
1. Don’t panic.
Ask the HR department if they have names or can provide references for local employment services. Many of these services offer help ranging from resume writing and interview skills to finding temporary or permanent employment opportunities. Additionally, make sure to understand your options for insurance continuation through COBRA. Remember: There are resources available make sure to use them.
2. Review your budget and Emergency funds.
When evaluating your budget you should divide your expenses into two groups: essential and non-essential. Essential expenses are the ones you must pay and non-essential expenses cover things you like to do or purchase.
Cut out or cut back on as many of the non-essential expenses you can. Get your family involved in the conversation, ask them for input and ideas to reduce spending.
Once you have reduced your spending look at your emergency fund. Most financial planners recommend having between 3 to 6 months of essential expenses in cash. I would recommend having emergency funds that cover between 6 months and 1 yr. of living expenses.
Understanding your budget and determining how long you can cover your family’s living expenses can help provide a better sense of calm. It will allow you to focus on other planning needs.
3. Know your options regarding 401k plans.
When you separate service from a company you typically have 4 options available to you with your 401k plans. 1) You can leave your funds as they are in the current plan (this is typically not offered if a company has declared bankruptcy so you will want to check with your HR department to know for sure), 2) rollover your funds to another employer sponsored qualified plan, 3) rollover your funds into an IRA, or 4) take a lump sum distribution.
If you decide to rollover your funds, the recommend method is using a “direct” rollover. A direct rollover goes from carrier to carrier and you will not be subject to the 60-day window as you would be if you were to receive the funds yourself.
Employees should be cautioned when taking lump sum distributions. Electing to take a lump sum distribution means that you have received those funds as income. By doing this, the money is subject to income tax and if you are younger than 59 ½ you may incur a 10% early withdrawal penalty assessed by the IRS.
Consulting with a tax advisor and financial advisor is best prior to making any decisions. They can help you with many areas of concern such as evaluating your budget, understanding your emergency funds, helping you evaluate the best options when electing to continue COBRA insurance, and what to do with your 401K.
If you find yourself laid off remember to stay calm so that you can ask questions and clearly evaluate your options. By doing this you will greatly improve your ability to cope with the transition.