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  1. Introduction
  2. Surviving Financially – For a Few Months or Longer
  3. Figure Out Which Debt to Pay Off First
  4. Will You Need a Retirement Drawdown Strategy?
  5. How to Get Health Insurance After Losing Your Job
  6. How Much Should You Pay in Life Insurance?
  7. Job Hunting for People Over 50
  8. Resumes and Interviews
  9. Moving On

Your most pressing concern after a layoff will likely be how to make ends meet until you find a new job. Even in a best-case scenario – you land an interview for a new job within a week of getting laid off and the interview goes so well that you get hired – it could be a few weeks before you actually start working again.

In October 2017, the average length of unemployment was 26.0 weeks, and about a quarter of workers are unemployed for 27 weeks or more, according to the U.S. Bureau of Labor Statistics. (See Where Unemployment Hits Hardest.) The median length was just under 10 weeks, however. (See What the Unemployment Rate Doesn’t Tell Us.) The point is, while it’s good to be optimistic about your prospects for getting rehired quickly – you’ll likely do better if you approach your job search with energy and enthusiasm – when you’re mapping out your financial situation, you’d be wise to figure out how you’ll get by for at least three to six months without the steady paycheck you’ve been accustomed to. (See 4 Ways to Cope with Long-Term Unemployment.)

Your Final Paycheck

State law determines when your employer must give you your final paycheck (see the specifics here). This paycheck should include not only your usual pay for the time you worked between your last paycheck and your final day of work, but also any payout you’ve earned for accrued, unused vacation and sick time (all of which the IRS considers taxable income). If you are fired in California, for example, your employer must issue your final paycheck immediately; in Illinois, employers have until the next scheduled payday. For some workers, this final paycheck will be the last money they ever receive from their employer; more fortunate employees will receive severance pay.

How Severance Pay Works

Companies are not required to offer employees severance pay unless they are obligated to do so by an employment contract or a union agreement. In a 2017 report, about 52% of companies surveyed by RiseSmart, a leading provider of career transition services, said they don’t offer severance pay to all employees – officers and senior executives, followed by managers and professionals, are most likely to receive severance pay, while administrative and clerical workers are less likely to receive it. But 38% of surveyed companies said they offer severance pay to all employees after involuntary separation. Only 10% of surveyed companies said they offered no severance pay whatsoever. Rates vary by industry, with those in aerospace, defense and government agencies being the least likely to receive severance and those in computer software, banking and financial markets being most likely to receive it. (See The Layoff Payoff: A Severance Package.)

If your company provides severance pay, you may receive it in a lump sum or in a series of payments. The lump sum can cost you more in taxes up front because as far as the tax code is concerned, you’ve gotten paid more than usual and your tax withholding must go up accordingly – yes, severance pay is taxable. The IRS classifies severance pay as supplemental wages, or extra money from your employer beyond your regular salary. This means tax withholding on your severance pay will be calculated differently than tax withholding on your regular paycheck.

Here’s how: Either 25% of your severance pay will be withheld for federal income taxes, or ordinary withholding rates will apply based on the combination of your severance pay and final paycheck. Severance pay can push you into a higher marginal tax bracket and result in more withholding than you might have expected. If too much is withheld, you’ll get a refund when you file your tax return, but if you get laid off in May, you’ll be waiting a long time to get that refund. (See How to Minimize Taxes on Severance Pay.) However, a lump sum severance payment can improve your eligibility for unemployment benefits, depending on your state’s laws.

Receiving severance as a series of periodic payments can keep your income and taxes at the level you’re used to and might come with continued health benefits at the premiums you’re used to paying, according to AARP. But periodic payments might mean you have to wait longer to claim unemployment benefits since you’re technically still receiving income from work.

Most companies that offer severance pay provide one to two weeks of pay to rank-and-file workers for every year they’ve been with the company, but there may be a cap, such as 26 weeks. RiseSmart found that the most common payout for companies with 500 to 10,000 employees that offer a standard severance package is six months’ pay. For companies with more than 10,000 employees, the most common severance package was three months’ pay. Severance pay may be based on your level, tenure and salary; management employees may receive more than lower-level employees. Almost all employers will require you to sign a release of claims against the company in exchange for collecting severance, but RiseSmart found that employees older than 40 are often given 60 days to do so, which is longer than the 21 to 45 days required by the Older Workers Benefit Protection Act. Be sure to read the documents and consider consulting with a lawyer before you sign anything. The release of claims minimizes the employer’s risk of dealing with an expensive lawsuit from a terminated employee. (Read 7 Considerations When You Negotiate Severance.)

Unemployment Insurance Benefits

Employers pay into a state unemployment fund, and when you’re laid off, you can collect benefits from that fund. It is often called unemployment insurance even though it’s not technically insurance. To receive unemployment insurance benefits, you’ll need to be an eligible employee, which means you need to have worked for an employer that pays into the unemployment insurance fund (most do) and you’ll need to have earned a certain minimum amount of money from that employer. Then, you must file a claim with your state. (See How to Apply for Unemployment Insurance.) You must be unemployed through no fault of your own to be eligible, meaning that people who choose to quit their jobs don’t usually qualify (exceptions might include quitting because of dangerous working conditions or sexual harassment).

Benefits are temporary; how much you receive and for how long depends on your state’s laws. Most states pay benefits for 13 to 26 weeks. (See States with the Shortest Unemployment Benefits.) Expect to wait two to three weeks for your first benefit check. To continue receiving benefits, you’ll have to keep filing claims every one or two weeks and answer questions about any income you’ve earned from work and any job opportunities you’ve had. Sometimes a personal interview at your local unemployment benefits office is required. (See What are the key points when getting ready to file for unemployment aid?) Local unemployment offices can sometimes help you find a new job or get trained for a new job.

Your benefit amount is based on a percentage of your earnings over a recent 52-week period but is capped at your state’s maximum. You will only receive a few hundred dollars a week, at most, which might be nowhere near your previous earnings. Unemployment benefits are taxable, and you can opt to have your state withhold 10% from each check, which may be smart if you’re worried about coming up with the money when you file your federal return. Learn more about the unemployment benefits available in your state at careeronestop.org, a website sponsored by the U.S. Department of Labor. (For related reading, see Help! My Unemployment Benefits Are Running Out!)

Self-employed individuals who work as sole proprietors are not eligible for unemployment benefits, but self-employed individuals who have structured their companies as S corporations and made themselves employees may be eligible, depending on their state’s laws.

Using Your Emergency Fund

Ideally, you already have an emergency fund with at least three months’ worth of living expenses. After you’ve exhausted any severance pay and unemployment benefits – or if you need to supplement those payments right away – your emergency fund is the next best place to turn for money to pay your bills. Unlike taking out a loan or charging a purchase to a credit card, when you use your emergency fund, you won’t add to your financial problems by accruing interest on debt. Yes, it can be stressful to watch your emergency fund dwindle. Try to remember that you’re using the money for the exact purpose for which it was intended – and that when you start working again, you’ll be able to rebuild it. (For related reading, see Why You Absolutely Need an Emergency Fund.)

Budgeting for Lean Times

Revising your existing budget or creating a new one can also help you manage your money during this challenging time. Go through all your regular and irregular expenses by looking at your credit card and bank statements and prioritize. Which payments do you need to make no matter what? For most people, these will include a housing payment, utility bills, health and life insurance premiums (more on those in chapters 5 and 6), medication and a bare minimum of groceries. What can be cut or reduced?

Maybe you can rely on a $10-a-month Netflix subscription for at-home entertainment instead of a $100 cable TV subscription. You probably don’t need a land line if you have a cell phone, and you may be able to switch to a less expensive cell phone plan. Maybe you can stop buying bottled water and switch to a reusable filter. Skipping the annual family vacation in favor of a staycation could save thousands. Cut back for now on gifts and charity; you can make up for it with increased giving later, or give your time instead of money while you’re unemployed. Bonus: Volunteer work can help your resume, and you might make new connections that can help you find work – or at least new friends who can help you during this challenging time.

Look for every way possible to match up your new, lower income with your expenses. Cutting spending can be painful, but remember that it’s likely temporary. You might even find that you don’t miss some of the things you cut out or that you prefer the things you replace them with. Look at it this way: Many people choose to reduce the stuff in their lives when they reach retirement; this may be a chance to get a jump on that process. (For detailed instructions on how to create a budget, see our Budgeting Basics tutorial.)

In the next chapter, we’ll talk about how to deal with debt when you’re unemployed.

Figure Out Which Debt to Pay Off First
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