With all the downsizing going on in the industry, I have had a lot of people ask me about their retirement or severance packages and doing the best thing. In the next few weeks, I will discuss some of the issues that I think are pertinent to this type of planning.
Are you ready to retire?
There you are in a state of shock. You just got the notice that your position has been terminated. Sometimes that shock is a pleasant one because you were not happy in your job, planning a career change or thinking about retiring anyway.
Other times, the shock is not a pleasant one. What happens next? Where do I go from here? How will I replace my income? Am I too old to get another job?
Whether the change is pleasant or bitter, it is a significant change in your life and you will need to take some time to remove the emotions so you can try to make some logical decisions to better your life. It’s been said, “In life it is not how far you fall but how high you bounce that counts.”
What are your choices?
Chances are, if you are laid off or have elected voluntary buyouts; you will have a number of financial decisions to make.
- Severance allowance. First, you might get a severance package of some sort. Often this lump sum windfall is based on how long you have worked for the company and is expressed in terms of number of weeks, months or years in salary. For example, Tony (age 42) worked for his company for 25 years and got 12 months salary which worked out to about $80,000.The key issue to realize is that this severance or retiring allowance is 100% taxable. It will have to be added to your current income and taxed at the appropriate marginal tax rate. In a future article, we will talk about how to minimize that tax bill.
- Pension transfer. If you were part of a pension plan you will be entitled some options to transfer your pension. Generally you will be given one of 2 basic choices.First, you can leave the money with the company pension plan. Under this option, your company typically provides you with a guaranteed pension amount at normal retirement (age 65). You may have provisions to take the pension earlier but with a reduced amount based on a prescribed formula. You will also have the option of choosing between single life pensions or joint life pensions, guarantee periods, and integrated options with government benefits.
Alternatively, you will be able to move the money out of the company pension plan to be self-managed. Under this option, you can move it to a Locked-in Retirement Account (LIRA) for accumulation purposes. You also may be given the option to purchase other retirement income vehicles like a life annuity, Life Income Fund (LIF), or Life Retirement Income Fund (LRIF)
- Other benefits. Other benefits like life insurance, health and medical coverage, re-training programs, and provisions for further education or starting your own business.There is little consistency in these areas so you will need to evaluate and negotiate terms with your employer. The one thing I will mention deals with conversion of your life insurance to a personal plan. Typically, conversion rates are high because they guarantee life insurance regardless of health and underwriting. If you are healthy and you still need life insurance coverage, you will be better off going out and shopping the market for a new personal plan. It might be a little more hassle but it will save you money.
In addition to these financial decisions, you may have to take time to evaluate your life goals and dreams. Will you make a career change, further your education, start your own business, and retire early? Whatever the case may be, you will have a number of emotional and life planning issues to deal with. Making decisions once you have been let go can be a very important but confusing process. In the next few weeks, I will deal with the topic of retirement both financial and emotional in more detail.