Learning that your job has been eliminated is one of the most stressful times in anyone’s life.
Yet people in this position quickly need to understand the details of their severance package and make important decisions about their financial future.
Should they take their pension in a lump sum or as a monthly check? When should they cash in their stock options? And, most important, do they need another job to postpone spending their lifetime of savings?
When The Coca-Cola Company announced in January that up to 1,800 employees would be laid off, the first step for each employee was to analyze their severance package and understand how it could affect their personal finances.
I advised one Coca-Cola employee that if she can remain in her current job for at least another seven months, or get hired for an open position, it would give her 10 years of company service. This milestone would qualify her for lifetime medical and higher pension benefits, four years to exercise her stock options, and allow her to keep all of her unvested stock options.
Here are key short- and long-term decisions facing any executive in this situation:
· Severance pay. This varies by company, your position and years of service, but will typically range from two weeks to two years of salary.
This lump sum feels like a windfall, but it can disappear quickly without a plan. Options include paying down debt, making new investments, using it for future cash flow, enhancing your child’s college savings or using it as part of your withdrawal plan during retirement.
· Stock options. For longtime Coca-Cola employees, company stock is often their most lucrative asset.
An executive with 10,000 shares valued at $42 per share must have a plan for his or her $420,000 in Coca-Cola stock. I’m often asked if it’s wise to keep the stock or diversify into other holdings; developing an overall wealth management strategy will help answer this important question.
· 401(k) retirement plans. To reduce taxes, people need to contribute the maximum amount from their remaining paychecks to their 401(k) plan before they are terminated. In many cases severance pay can’t be deferred into the 401(k) plan, so time is of the essence.
Also, each person must decide if he or she wants to leave investments in the company 401(k) or roll them over into a separate Individual Retirement Account. Executives with after-tax money in their 401(k) plan have a new opportunity to move some of this money to a tax-free Roth IRA.
· Pension. Taking a lump sum or a monthly annuity could be the most important decision you make regarding your retirement.
Everyone has different needs, but most people who are married, in good health and between ages 55-65 choose the monthly annuity. Those with significant assets or other company pensions may want to roll the lump sum into an IRA, deferring the taxes.
Many ex-executives also face decisions on deferred compensation and how to replace company-paid medical benefits. A financial advisor can help map a strategy to maximize annual income while also managing the value of long-term investments. The income strategy often involves determining a start date to begin drawing Social Security, as well as withdrawals from their 401(k) accounts and pension incomes.
Most people lose a high-paying job only once. Creating a strategy that takes full advantage of all available options can help get anyone back on their feet and prepare them for their financial future.
Lisa Brown is a partner and wealth advisor at Brightworth, an Atlanta-based financial planning and investment firm.
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