The numbers are real, and they’re likely affecting a number of your clients: 56% of Americans lose their jobs (layoffs or other involuntary causes) between age 50 and retirement. Of that number, only 10% ever earn as much as they previously did.1 Even if these workers accept a sizable buyout package, they’re now jobless usually well before they planned to leave the workforce.
People at this age may be financially vulnerable as they approach retirement. They could be caring for aging parents, putting their own kids through college or paying off other long-term debt. Suddenly having no income can be devastating during a period when it's most difficult to make up a savings shortfall as they try to get rehired.
A job loss for middle-aged women and men comes with numerous hardships. And financial advisors are in a unique position to address each situation and minimize any long-term financial damage.
Immediate needs first.
Losing a job is shocking. A client may have trouble thinking about day-to-day needs with his/her long-term financial outlook being so daunting. Advisors can help clients set short-term goals, find efficient ways to generate income and create a financial structure for the next few months, which could be the most turbulent times they’ve known.
First, review the client’s finances and…
- uncover ways to cut unnecessary expenses
- identify any cash reserves and after-tax money (such as savings accounts)
- determine how to allocate severance, if any
- assess if a part-time job is needed, even if short-term
Second, find and consider…
- assets that could be liquidated
- the cash value of any life insurance policies
- taxable distributions (asset growth) from an after-tax deferred annuity
- withdrawals of prior Roth IRA contributions
Third, if a client sees a layoff coming, he/she could consider opening a home equity line of credit (HELOC) ahead of time that behaves like a credit card just without the high interest rate. The client can draw against it when needed and, as the revolving balance is repaid, the credit again becomes available. This can be a solid way of meeting living expenses during a period of unemployment. Think of it as a homeowner getting equity from his/her home without selling it or refinancing the mortgage.
When tapping into retirement funds is unavoidable.
The last thing people in their 50s want to do is dip into retirement accounts. However, if that’s necessary, you can help your clients with strategies that make distributions less painful.
Your unemployed clients can’t take a loan from 401(k) plans opened at former employers. But someone could set up a Solo 401(k) plan if he/she approaches unemployment and the job search like self-employment. This allows for a 401(k) asset rollover, and a loan could be taken from the Solo 401(k) instead.
Do your clients know the “age 55 rule”? This allows people between 55 and 59½ who are jobless (laid off, fired, quit) to draw from a 401(k) without a penalty. Normally a 10% early withdrawal penalty would be incurred. However, the client does have to pay income tax on the distribution.
IRAs are different. Although there is no “age 55 rule,” a client can avoid early withdrawal penalties from IRAs by using 72(t) payments, which can start at any age. These fixed annual SEPPs (substantially equal periodic payments) can’t be changed or stopped during a 5-year period (or until age 59½, whichever is longer).
An eye on future success.
A client may decide to start a business. He/she could be tired of reporting to higher-ups, or the uncertainty of getting laid off again creates too many sleepless nights. Advisors can help a client set up his/her business, including advice on where to draw financing (personal savings, portfolio assets, selling stock options, etc.)
Some of your clients will decide to focus on getting training or going back to school. Encourage them to talk with recruiters and weight options they may not have considered. One tough thing you may have to remind them: ageism is real, and it hurts. Older workers do seem to have more struggles than younger workers when job searching. While not legal, it’s a fact that your clients may have to face.
Feelings are priceless.
Although we mention this last, perhaps this is the first thing you should do: listen. Job loss is psychologically demanding as well as financially challenging. Treat your client like a family member, asking about his/her vision for the future and life goals. Remember, helping a client succeed during tough times fosters lifelong loyalty. Not only are you solidifying this relationship, you’re opening the door for potential referrals.
Job loss, and the hardships that follow, are tough to experience, yet this life event offers advisors an opportunity to become an even more valuable resource. Approached properly, these trying times can position you as the perfect help clients need to transition well, both financially and emotionally.
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1Investment News, Middle-aged and out of work: When clients over 50 lose their jobs, advisers become a lifeline, February 23, 2019