Be a Severance Superhero with Financial Planning
Senior to executive-level professionals often face job loss at some point during their professional lives. This employment transition can spark a variety of emotional and financial implications. While some leaders expect the change (maybe even look forward to it) for others the notification comes as a complete shock. Regardless, financial planning before during and after your severance period can help you and your family optimize the outcome of your employment change. So, power up and be superhero severance ready with these tactics.
Pre-Severance: Plan for the Expected or Unexpected, i.e. always be ready for the "surprise" attack
What is the state of your current company and how do you fit in it? Key indicators of a potential severance can be strategy or leadership changes, poor financial performance, declining performance reviews and previous rounds of layoffs. If any of these are occurring at your workplace it is time to get your financial and human capital house in order.
- Get financially organized- Prepare your personal balance sheet to evaluate cash positions, evaluate what investments you may want to consider shifting to a more conservative position and review liabilities for any risks related to balloon payments or the need to restructure your debt for additional flexibility and liquidity. Secondly, put together your cash flow statement to understand what level of income is needed to sustain your lifestyle and evaluate where you can cut expenses while there is some employment uncertainty. Don't know where to get started or if you aren't self-motivated in this area, evaluate hiring a CERTIFIED FINANCIAL PLANNER™ Professional at www.letsmakeaplan.org/choose-a-cfp-professional.
- Polish your human capital – Update your resume and LinkedIn profile including an attractive headshot. Engage with your network through community service, association activities or simply reaching out and having coffee. Hiring a career coach can be a huge value add if these seem daunting. Find a certified coach at https://coachfederation.org/find-a-coach/.
- Gather your important documents and review- These include your standard benefits enrolment summary to understand what coverage gaps you would have if you were let go including life, disability and health insurance. Also, what is the structure and timing of your compensation – if you have restricted stock units, stock options, phantom stock or other special compensation benefits have the plan documents and your specific grant letters on hand. Finally, if you signed documentation when you joined the firm or during your employment, such as an offer letter, covenant agreement, non-compete or solicitation agreement, have these documents easily accessible. If you did not have a labor and employment attorney review any signed documents, gather two to three attorney suggestions from trusted contacts.
Severance Negotiation: Understand your superpowers and assemble your team
If you are asked to leave you may or may not be given a severance package immediately. Once notified, it is time to assemble your team and build a case to negotiate a package that meets the needs and goals for you and your family.
- Employment & Labor Attorney – Speak to your attorney or interview two to three referred labor and employment attorneys about your situation to help you access whether further representation is needed. A severance offer would typically include the requirement that you sign-off on the package offered. Do not sign until this document is reviewed and you have fully evaluated whether you are getting a fair deal. Packages can appear straightforward, but often there can be room for negotiation, especially if you must give things up like unvested restricted stock units and bonus payouts. Your attorney will review your severance agreement and your original offer letter and covenant
- Note that negotiable items can be non-financial too, such as negotiating the last date of employment and the public statement on why you left your company.
- Accountant- Inform your accountant of your severance so he or she can share advice related to your package during and post-negotiation. One tax strategy can be receiving a severance in two calendar years to decrease a tax spike (this is best done at the end of a calendar year and may not be applicable if you are severed early in the year). Your accountant can also share advice related to withholding and the need for estimated tax payments.
- CERTIFIED FINANCIAL PLANNER™ Professional – Ideally you have been working with a professional and are already organized. If so, she or he can bring thorough knowledge around components that will be helpful as you work with your attorney to negotiate. Examples include an updated balance sheet and cash flow statement, executive compensation structure and knowledge of your company's stock, employee benefits and opportunities to defer income including access to a retirement plan and health savings account.
- Career Coach- Engaging a professional coach early can help with your emotional state and be a wonderful sounding board as you prepare to start a new chapter. Initial advice can include taking care of your mental and physical health rather than jumping into a job search immediately following your notice.
Post Severance: Clean-up and reanimate
Once the deal is done there is a lot of personal and financial clean-up. Working collaboratively with your CFP®, CPA and coach can ease the transition and position you for career and financial success. The list below is not exhaustive but outlines key priorities that need to be evaluated. During this stage, don't forget to take some time for yourself.
- Complete an insurance needs analysis and understand disability and life insurance gaps based on the coverage you had with your employer. Also review your health insurance options including COBRA, spousal coverage as applicable or coverage via the exchange.
- Evaluate your investments. Do you have an asset allocation that is now too risky, too conservative or a concentration in employer stock? Work with your CFP® and CPA to understand the pros and cons of minimizing concentrations in your company stock. Additionally, evaluate options for your retirement plan(s). If you have a sizable balance you can typically keep your plan where it is or consider rolling into an Individual Retirement Account or wait and evaluate rolling over into a future employer retirement plan.
- Talk to your accountant again. Because of a typical spike in income during the year of a severance, frequent communication with your accountant can be very helpful. If you have an income spike identifying tax-deferred savings opportunities or potentially lumping charitable gifting through a donor advised fund can be a couple of strategies you can review with tax projections.
- Deal with your loss. The loss of employment can include all the stages of grief so take time to feel and then ask yourself a lot of questions. What does this next chapter look like? Is it another corporate role, independent contractor work or a complete change-up? Your career coach can help with questions if you don't know where to start!
Don’t delay…. get started with pre-severance financial planning so if you have an expected or unexpected employment change you can handle it like a superhero!
Brooke Napiwocki, CFP®, MBA
Crescendo Wealth Management LLC
- Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
- The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
- Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Crescendo Wealth Management, LLC and JWC/JWCA are unaffiliated entities.