Laid Off Close to Retirement? Here’s What to Do With Your Money

If you’ve just been laid off and retirement is around the corner, it may be stressful, especially if you were looking to save more before leaving the workforce. While you may feel powerless after a layoff, you still have options.

With the right financial moves, you can protect your nest egg, reduce stress, and build a bridge towards retirement that will help you realize your long-term goals.

What to Do Right After a Layoff

The first move after being laid off is to step back and absorb what happened. Resist the urge to panic and start withdrawing funds from your retirement account.

“You have to address the emotional part first before you can get into any numbers or findings,” says Crystal Cox, CFP and SVP at Wealthspire Advisors. “Things might look a little bit different, it’s a shift in perspective, but you will be ok.”

Start by assessing your entire financial profile: How much do you have in savings? What expenses can you cut out or cut back on? Is your company providing severance? For how long? Can you claim unemployment? Are there other sources of support available to you?

The goal is to optimize your cash flow before you start using long-term savings. You may even need to take on part-time work or consulting jobs to cover any holes in your finances. This may help you delay withdrawing retirement funds or claiming Social Security. These strategies can add up to thousands of dollars in the long run.

Avoiding Costly Mistakes

It may be tempting to use funds in your retirement accounts when you’re short on cash. But withdrawing from a retirement account, such as a 401(k), before age 59½ can come with taxes and penalties. Even if you can avoid that, you’ll miss out on years of compound growth.

“Another common mistake…is claiming Social Security early, but that might not be the best decision,” said Cox.

You can claim Social Security as early as age 62. But if you collect at age 62, your monthly benefit will be reduced.

However, if you’re able to wait until full retirement age (FRA) to collect, which is age 67 for those born in 1960 and later, you’ll receive a boost in your monthly benefit. Plus, if you’re able to delay past FRA, your monthly benefits will increase 8% for every you wait, up to age 70.

Instead, Cox suggests finding some type of employment that will bridge the gap before you reach FRA. And if you start claiming Social Security benefits early and realize it wasn’t the best move, you still have some leeway.

“You can actually repay Social Security if you change your mind within the first year of claiming it,” she adds.

Rethink When You’ll Retire

Being laid off when you are about to retire may force you to reassess your timeline. It doesn’t mean you can’t retire, but it may change when you retire. Think about working part-time or going into semi-retirement.

It may not be ideal, but it may allow you to transition to retirement in a way that is less stressful and more financially sound. Take stock of your current assets, Social Security income, and reduced expenses. It may turn out that delaying retirement by just a year or two will allow you to retire comfortably.

Navigating Underemployment

Taking a lower-paying job or working fewer hours might feel like you’re falling behind your retirement goals, but you’re still building financial stability.

The most important thing is to remain committed to your financial plan. By reducing spending, adjusting lifestyle expectations, and being consistent with retirement savings, your retirement future is still in sight. You just need to adjust how you will get there.

Retirement savings can get tricky if you relied on contributing to a 401(k), which workplace retirement plans available through your employer. Yet not all employers offer one. If you are in that situation, you still have options—you can consider opening a Roth individual retirement account (IRA) if you’re eligible or a traditional IRA otherwise.

“Assuming you have additional cash flow that you can still put to work, IRAs are a great option,” Cox says. “Especially Roth IRAs, if you’ve got income to support it.”

Navigating Healthcare and Benefits

Healthcare is one of the most challenging and stressful parts of being laid off. COBRA can be an option in continuing your healthcare plan from employment, but it can pricey—while your employer may have paid a portion of the premiums in the past, you may now be on the hook for their portion of the premium as well as your own, plus a 2% fee.

Take the time to compare it against health plans on the Health Insurance Marketplace. Many people may qualify for subsidies, which bring down premium costs.

If you’re 65 or older, look into how and when to sign up for Medicare to avoid late penalties.

The Bottom Line

Getting laid off close to retirement can be difficult, but it doesn’t mean your dreams of retirement are shattered. With some careful planning and adjustments, such as cutting costs, delaying withdrawals and Social Security, and taking on part-time work, you can still achieve a comfortable and secure retirement.