Got fired? Worried about your job? Don't make this common money mistake

Monday, 28 October 2024

Got fired? Worried about your job? Don’t make this common money mistake

by BD Banks

The economic uncertainty beginning in mid-2022 that coincided with surging inflation also brought a wave of layoffs as businesses attempted to recalibrate. This trend continued through 2023 and 2024, hitting the tech industry the hardest.

According to data from the Federal Reserve Bank of St. Louis, the total number of layoffs increased 10% to 19.7 million in 2023, up from 17.6 million in 2022.

While layoffs are an unfortunate reality, a competitive job market can prevent consumers from making ends meet, building up an emergency savings fund, or even continuing to make 401(k) contributions.

About 36% of workers note that they are generally saving less, and 30% say they are spending more than last year due to inflation and the economy.

Adding layoffs to already shaky economic conditions can derail financial plans. It shifts the priority away from planning for the future toward just getting by in the present. However, foregoing retirement contributions for six months or a year could significantly impact your total account balance when you retire.

Workers are increasingly worried about layoffs

70% of workers are anxious about looming layoffs, and 40% are trying to save more to prepare for a potential layoff, according to a Marketwatch Guides survey of 1,000 adult workers.

If laid off, 40% of people would run out of money within one month, and 24% said they would only have enough to cover two weeks.

Cash-strapped workers are looking for ways to increase their disposable income, especially in a financial emergency. 54% of workers noted they decreased or stopped their retirement savings altogether due to inflation. Another 43% reported they had to dip into their savings to cover expenses.

More on retirement:

While it may seem like an easy way to increase your take-home pay during a pinch, reducing or cutting 401(k) contributions for even a few months can significantly impact your retirement savings’ bottom line.

Assuming a 9% contribution with a 3% employer match, taking a one-year break from 401(k) contributions would reduce your overall retirement account by $196,469 if you make $50,000 annually.

Those making $75,000 annually would see a reduction of almost $160,000, and those making $100,000 would miss out on $212,936. Of course, these losses depend on the age at which you take that retirement savings break.

Charles Schwab notes that IRA contributions of just 1% of your paycheck can pay off in the long term. Temporarily reducing contributions instead of completely stopping them will maintain the employer match and ensure that the account grows, even with modest gains.

A young couple is seen discussing finances with an advisor.

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What to do with your 401(k) after you’ve been fired or laid off, or switched jobs

Understanding how to manage your assets and retirement accounts is crucial after leaving a job due to a layoff or job switch.

If you attempt to withdraw from your 401(k) before age 59.5, the funds are subject to a 10% penalty fee.

While Secure Act 2.0 allows employees to allocate up to $2,500 per year penalty-free to cover emergency expenses, this may not be enough for those severely struggling.

401(k) plans are nuanced, and it is crucial to learn to manage the accounts without incurring penalties or fees.

Over 40% of employees cash out their retirement accounts when they leave a job, and most experts note that this is a big mistake that could significantly impact their quality of life during retirement.

Why? Consider the data above. Stopping retirement contributions when times get rough creates a big hurdle to financial freedom later in life. Withdrawing money from retirement accounts makes that hurdle even higher. You’ll unlikely be able to contribute the withdrawn money back to those accounts quickly, so you’ll miss out on significant benefits associated with compound interest

Merrill Edge notes that employees have three options when leaving a company: keep their accounts as is, cash out entirely, or roll their accounts over to their new employer’s retirement plan if they have one.

Keep your current retirement account: If your account balance is less than $7,000, you can keep your funds in the account with your previous employer. Assuming you are happy with your portfolio performance, this is the easiest path forward. While you won’t be able to continue making contributions to the account, you can still manage the investment decisions.
Cash out your retirement account: You can receive a lump sum of your entire account balance, though it will be subject to hefty penalty fees and taxes. The funds will have 20% withheld to federal income taxes and a 10% early withdrawal fee if younger than 59.5. Using this approach, you could lose up to 50% of your account balances to taxes and fees.
Rollover your account balance to an IRA or new 401(k): You can roll your funds over to the retirement plan of your choosing, penalty fee via direct or indirect rollover. Direct rollovers are the most simple approach, as the funds transfer from your 401(k) to your IRA without needing any direct involvement. However, any rollovers to a Roth IRA are subject to a 20% withholding.