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[Prefer to listen? You can find a podcast version of this article here: E240: What to Do if You Lose Your Job]

Losing your job is never easy, whether you saw it coming or it took you by surprise. Beyond the emotional toll, the financial uncertainty can be overwhelming. However, with thoughtful planning and strategic actions, you can protect your financial future and manage the transition to your next chapter with confidence.

Thinking through some key considerations can help you take control of your situation after a job loss.

Health Insurance: Don’t Let Your Coverage Lapse

One of the most immediate concerns after losing a job is what happens to your health insurance. Without an employer footing part of the bill, it can be challenging to maintain coverage. But you do have options to ensure you remain insured during this time.

COBRA Coverage: Keeping Employer-Sponsored Health Insurance

If you worked for a company with 20 or more employees, you may qualify for COBRA (Consolidated Omnibus Budget Reconciliation Act). COBRA allows you to remain on your employer’s health plan for up to 18 months after your employment ends. While you’ll need to pay the entire premium—often far more than you’re used to paying—it can provide important continuity during a critical time.

You have 60 days to elect COBRA coverage. While subsidies for COBRA premiums are not standard, they may be available during specific circumstances, such as legislative actions or government programs.

Other Health Insurance Options

If COBRA isn’t a feasible option or if it’s just too expensive, there are alternatives:

• Join Your Spouse’s Plan: If your spouse has employer-sponsored health insurance, this could be the most affordable and straightforward option. Check with their HR department to add you to the plan as a dependent.
• Marketplace Health Insurance: The Health Insurance Marketplace is another viable option. Under special enrollment rules, you have 60 days after your job loss to sign up for a plan. Depending on your household income, you may qualify for subsidies, which can lower your premium significantly.
• Medicare: If you’re over 65 and haven’t enrolled in Medicare yet, you can do so during a special eight-month enrollment period triggered by the end of your job or your employer-provided insurance.

Don’t wait until the last minute. Get up-to-date on medical and dental exams, and take care of any pending procedures while you’re still covered. Having these things out of the way will give you peace of mind as you transition to new coverage.

Building and Managing Your Emergency Fund

When you lose a job, cash flow can become an immediate concern, so having a robust emergency fund is essential. Ideally, an emergency fund should cover three to six months of living expenses, but if you have time before your job ends, focus on building it as much as possible.

Even if your job loss is sudden, reassessing your spending and reducing non-essential expenses can stretch your emergency savings further. Prioritize housing, utilities, groceries, and healthcare, and eliminate or reduce discretionary spending like dining out, subscriptions, and non-essential shopping.

Using a Flexible Spending Account (FSA)

If you have an FSA, use it while you’re still employed or covered under COBRA. FSAs are funded through payroll deductions, and once you’re no longer employed, you can only use them for eligible expenses incurred while you were employed. Plan ahead and spend on things you’ll need later, such as glasses, medications, or medical supplies.

Reviewing Compensation and Severance Packages

Your next step should be understanding any remaining compensation or severance you’re entitled to. Check with your HR department to clarify the details of:

• Back Pay: This could include unpaid wages or bonuses.
• Sick or Vacation Pay: Some companies pay out unused sick or vacation time when you leave, while others don’t. Make sure you know what applies in your situation.
• Severance Pay: If you’re receiving severance, understand the terms. Some severance packages require you to sign a non-compete or non-disparagement agreement, so review the fine print carefully.

If you’re unsure about the details, consider consulting with a financial advisor or employment attorney to ensure you fully understand what’s being offered and how it will affect your finances.

Applying for Unemployment Benefits

Unemployment benefits can provide a critical income stream while you’re between jobs. These benefits are state-administered, and each state has its own process for determining eligibility and the amount of assistance you’ll receive. Generally, benefits last for about 26 weeks, though extensions or enhanced benefits may be available during periods of high unemployment or economic downturns.

It’s important to apply as soon as possible, as there can be a processing delay. Keep in mind that unemployment benefits are considered taxable income, so you’ll need to account for that when planning your taxes.

Budget Review: Trimming the Fat

When income becomes uncertain, a budget review is crucial. Focus on identifying areas where you can reduce or eliminate discretionary spending. Look closely at your monthly expenses and categorize them into needs versus wants. Some common areas to consider cutting back on include:

• Streaming services or TV packages.
• Eating out or ordering takeout.
• Non-essential subscriptions (e.g., magazines, apps, fitness memberships).

This might also be a good time to explore other ways to save money, such as switching to a lower-cost cellphone plan or negotiating lower rates for services like internet or insurance.

Cash Flow Strategies

Even with a pared-down budget, cash flow may be tight. Here are some strategies to help you manage during the transition:

• Part-time Work: Freelancing, part-time jobs, or gig work can help you bring in some income while you look for your next full-time opportunity. In some cases, freelance work may even lead to a new career path.
• Debt Management: Contact your creditors—whether for student loans, mortgages, or credit cards—and explain your situation. Many lenders have hardship programs that can help you temporarily reduce or defer payments.

Tapping Into Retirement Accounts

If you have a retirement account with your former employer, it’s important to understand your options. Depending on the type of plan and your age, withdrawing funds early could lead to penalties and taxes. However, in some cases, these penalties can be avoided.

401(k) Loans and Distributions

If you have a loan from your 401(k), check the plan rules to see how long you have to repay it. In most cases, loans must be repaid by the tax filing deadline for the year you leave your employer. If you don’t repay the loan, it may be considered a distribution, which could trigger a 10% early withdrawal penalty if you’re under age 55.

Special Considerations for Public Safety Workers

If you’re a public safety worker—such as a firefighter or police officer—you may be able to take a penalty-free distribution if you’re over 50 (or younger if you’ve completed 25+ years of service with the same employer).

Roth IRA Contributions and Conversions

If you have a Roth IRA, remember that contributions (but not earnings) can be withdrawn tax- and penalty-free at any time. This can be a valuable resource if you need to supplement your cash flow during unemployment.

If you anticipate a lower income for the year, consider doing a Roth conversion. Converting funds from a traditional IRA to a Roth IRA in a low-income year can be a tax-efficient way to take advantage of the lower tax bracket.

Stock Options and Deferred Compensation

Many employees receive stock options or deferred compensation as part of their employment package. If this applies to you, there are a few things to consider:

Unvested Stock Options

Unvested stock options are usually forfeited when you leave your job, but check your equity plan documents to be sure. Understanding your vesting schedule will help you make informed decisions about the timing of your departure.

Vested Stock Options

You’ll typically have a short window—usually about three months after leaving your employer—to exercise vested stock options. If you were terminated for cause, however, your options may be canceled altogether.

Deferred Compensation

Review your deferred compensation plan documents to understand when and how you’ll receive payments. These funds are usually distributed either as a lump sum or in annual installments.

Tax Strategies: Leveraging a Low-Income Year

If losing your job means you’ll have a lower-than-normal income this year, it could present an opportunity for tax planning. Lower income can open doors to certain strategies, such as:

• Roth Conversions: As mentioned earlier, converting traditional IRA funds to a Roth IRA can be advantageous during a low-income year, as you’ll pay less in taxes on the converted amount.
• Capital Gains Harvesting: If you have taxable investments, selling them in a low-income year may allow you to pay capital gains tax at a reduced rate.
• IRA Contributions: Depending on your income, you may still be eligible to make contributions to a traditional IRA or Roth IRA.

Career Planning: Your Next Steps

Losing a job can be the push you need to re-evaluate your career path and explore new opportunities. Use this time to update your resume, refresh your LinkedIn profile, and reach out to your professional network. It’s also a good idea to consider whether you’re subject to any non-compete or non-solicitation agreements, as these could affect your job search.

If your former employer offers outplacement services, take advantage of them. These services can provide support in job placement, resume writing, and even interview coaching, helping you get back into the workforce faster. Additionally, don't forget to update your contact information with your professional organizations, email subscriptions, and networking profiles to ensure you stay connected and informed about new opportunities.

Leveraging Professional Networks and Job Search Tools

Networking is one of the most powerful tools you can use when searching for a new job. It’s easy to feel discouraged during this time, but remember that many people have experienced job loss, and tapping into your network can open doors to opportunities you may not have found otherwise. Consider reaching out to:

• Former colleagues and managers: A simple email or LinkedIn message asking to reconnect can open new job leads.
• Professional organizations: If you belong to any trade associations or groups in your field, now is a great time to become more active.
• Social media connections: Update your LinkedIn profile to reflect your current job-seeking status and actively engage with industry discussions to increase visibility.

In addition to leveraging your network, be sure to explore various job search platforms including industry-specific job boards. Set daily or weekly goals for applications and interviews to keep yourself motivated and moving forward.

Handling the Emotional Side of Job Loss

While you're likely focusing on financial and practical considerations, it’s essential not to overlook the emotional impact of job loss. Losing a job can lead to feelings of grief, anxiety, and uncertainty. Remember that it’s okay to feel these emotions and take the necessary steps to care for your mental health.

Consider reaching out to friends, family, or a professional counselor to talk through your feelings. Keeping a routine, setting small daily goals, and engaging in activities that bring you joy can also help maintain a sense of control and normalcy.

Planning for the Future

As you navigate this period, take time to reflect on what you want your next chapter to look like. Job loss can be an opportunity to reassess your career path and pursue something that aligns more closely with your values and goals. Whether that means pursuing further education, starting a business, or transitioning into a new industry, this is your chance to chart a course toward a fulfilling career.

Keep in mind that the job market is ever-evolving, and with resilience and persistence, new opportunities will emerge. By maintaining a proactive approach to managing your finances and leveraging your network, you'll position yourself for success in whatever comes next.

Conclusion: Turning a Setback into an Opportunity

Losing a job can feel like an overwhelming setback, but with a thoughtful approach to managing your finances, health insurance, retirement accounts, and career planning, you can turn this challenge into an opportunity for growth. Prioritize your immediate needs, like health coverage and cash flow, and then focus on long-term strategies to enhance your career prospects and financial health.

Above all, don’t be afraid to seek help—from financial advisors, career coaches, or your personal network. This period of transition can be the catalyst for a stronger, more resilient future.

Download the checklist: What Issues Should I Consider If I Lose My Job?