It doesn’t matter whether you’re employed in the private or public sector – companies and government agencies equally struggle to boos the bottom line and stay within tight budget constraints.
Those efforts can sometimes result in downsizing. With little notice in many cases, employees are presented with severance packages or incentives to retire early.
If that unfortunate scenario occurs, you may not be in the state of mind, or have sufficient knowledge, to properly evaluate the offer. Downsizing packages often involve decisions that go beyond severance pay, including benefit replacement and pension considerations. A qualified financial planner can help you assess the package and consider the following issues:
Family finances. Income uncertainty can be a challenge, especially if you’re facing post-secondary education costs for children and other major ongoing expenses, such as a mortgage. The impact on your spouse, especially if he or she is still working, should also be addressed.
Tax planning. Your package may include a significant lump sum, which means you need a strategy to minimize taxes. For example, you might review your RRSP contribution limits and consider using the “retiring allowance” to defer much of the income tax as possible. Or some of the money could be applied to your spouse’s RRSP. In some cases, an employer may agree to make payments over two years. Proper planning in this area is essential, as some of these tax-planning opportunities are only available during the year of severance.
Spending habits. Compile a budget to track monthly expenses. A budget also helps you make changes to your spending patterns. You may decide to impose some restrictions and consolidate debts to reduce interest costs.
Pension choices. This can be one of the most critical financial choices. You should fully understand pension options, because the decision is permanent. If you plan to draw on your pension, determine whether a single or joint life pension is needed, as well as whether you want a guarantee on future income.
If you’re not at pension age yet, you may elect to have a deferred pension or take a “commuted value” out of the plan to rollover to your own locked-in RRSP.
Group benefit replacement. Determine if any employee benefits will continue. You may have to add to your budget premiums for health, dental, life and critical illness insurance to replace lost benefits. An assessment of whether to “self-insure” some of the costs or pay premiums to an insurance company to cover the potential risk needs to be completed. You may be able to apply to become a dependant under your spouse’s group insurance plan. Some coverage, such as disability insurance, will be discontinued because you’re no longer employed.
Income and asset review. By calculating your assets and potential sources of income, you can determine any shortfall in your budget. Income from your spouse or partner may help defray expenses. Consider all assets and sources, such as RRSPs, savings, and Canada Pension and Old Age Security. Review investments. Your risk tolerance has probably changed as a result of your unemployed status.
By using the services of a qualified financial professional, you can get the most out of your severance or early retirement package. Call our firm for help developing a realistic plan that reflects your personal situation and allows you to get on with life.