The experience of losing a job after age 50 is all too common. Many companies feel the economic need to downsize their workforce, and older employees often earn more than their younger counterparts.
While many of these older workers will find new jobs, the difficulty of finding senior-level roles plus the realities of age discrimination mean some will be faced with an unplanned career downshift — or even early retirement.
The financial and retirement planning that you do for your clients likely assumes a more normal retirement age into their 60s or beyond. If your client suffers a job loss prior to their planned retirement date, it is important that you are ready to guide them through the financial implications.
Questions to Ask, Items to Review
When advising a client faced with a late-career layoff, here are some issues to address. Every situation is unique, so this list will vary and is not exhaustive.
- Their age vs. their planned retirement date. Are they close to retirement or 7 to 10 or more years away? These are two very different planning scenarios.
- Is there a severance package or other type of buyout being offered by their employer?
- If they are married, does their spouse work? Is this compensation enough to cover their needs?
- Is seeking a job with a new employer in a similar position a viable option? Can they move into a consulting position in their area of expertise or an area of interest?
- What is their health insurance situation? Is their employer offering medical coverage that will bridge the gap until they are eligible for Medicare? Can they obtain coverage through a working spouse's employer?
- Are they due any bonus from their employer for performance or other reasons?
- Is your client owed any stock-based compensation?
- What are their balances in retirement accounts like 401(k)s and IRAs?
- Do they hold investments in taxable accounts?
- Are they eligible for a pension for their current or any former employers?
- What will their Social Security benefit be at various ages?
- If they own a home, is there a mortgage balance left on the property?
A key question that some clients ask is whether or not they should take a voluntary separation incentive offer from their employer. They should consult with their union representative, if they have one, to understand what their severance package might look like in the event of a layoff. But in many cases I have found that the first offer is the best.
A few years ago, a family friend came to me with a buyout offer from a large local employer. He was in his early 60s and I suggested he take it. He wanted to continue working and declined the offer. Unfortunately, he was laid off not long after — on terms less desirable than the original buyout offer.
Here are two case studies of hypothetical clients faced with late-career layoffs.
Dan and Mary
Dan is 59 and works in a director-level operational position with a well-known corporation. Dan has been notified that his position will be eliminated and his last day will be two months from now. The company has offered him six months' worth of severance as well as retiree medical coverage that he can keep in place until he is eligible for Medicare.
Dan's wife, Mary, is 60 and works as a high school teacher. She has 32 years on the job and works in a high-paying district. When she retires she will receive a generous pension, with Dan as the beneficiary in the event of her death.
Between them they have a bit over $2 million in their respective employer retirement plan accounts. They have two adult children, both of whom have graduated college. They are helping their kids pay off a portion of their rather small student loan debt. Additionally, they still have about three years left before their mortgage is paid off.
Their big decision involves whether they can both retire once Dan leaves his employer and when Mary's current school year is over. Mary loves teaching and is OK staying for another school year or two if needed. Likewise Dan will likely be able to find work on at least a half-time basis as a consultant within his industry, or perhaps even in a full-time role with another company
As their advisor you will want to look at their situation from several perspectives.
- What does their retirement look like if they both leave their jobs and retire this year?
- What does working for an additional one, three or up to five years add to their retirement situation if either or both continue to work?
- Will Dan's termination from his employer force them to tap into their retirement savings earlier than anticipated?
You will likely want to approach their revised retirement planning by looking at the impact of the scenarios listed above, and perhaps others, on the amount available to them annually and over time in retirement. When does it make sense to claim Social Security benefits? What type of lifestyle can their retirement savings and income support?
Dan's situation is not a bad one compared to many others who find themselves facing a late-career layoff. They have a solid level of retirement savings, Mary has a job with solid earnings and a pension, and Dan has some possibilities if he wishes to work for a few more years.
Unfortunately, there are others facing late-career layoffs whose situation is not as good.
Susan
Susan is 56 and has spent her career in human resources. She is single and has worked her way up the corporate ladder to become a senior manager in the HR department at a major corporation. Unfortunately, her company has fallen on rough times and Susan was laid off as part of a significant corporate downsizing.
Susan will receive six months of severance pay. Her 401(k) balance at her most recent employer is just over $500,000, she has a total of about $250,000 in an IRA that was rolled over from 401(k) plans from prior employers. She owns a condo unit that is paid for and has very little debt.
At 56, Susan feels too young to retire and will be actively seeking another, similar position. She is not sure of the job market and realizes that finding an HR spot at her old level might be difficult and that she might have to settle for a lesser position. Another option is doing some consulting work with a firm she is she used with her old employer.
As her financial advisor there are a number of areas of concern.
- What is the plan if Susan can't find a job at or near her previous level of compensation?
- What are her health insurance options if she doesn't find a new job? COBRA? Private insurance?
- Does it make sense for her to sell the condo unit if she can't find a job at a level that meets her needs?
If Susan doesn't find a new job or move into consulting, this could put into a very desperate situation. This could force her to eat through her savings and eventually her retirement money. As part of the analysis that you conduct for her, it's important that you look at areas where she can cut back and perhaps downsize. This can help preserve assets.
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