Maximizing Your Severance After a Job Loss
Written by Andrea Bannister
Friday, October 11th, 2019
Two years after toasting my promotion to junior executive, I was suddenly out of work, stressed and trying to piece together what just happened. Termination letter in hand, my eye zoomed down the page to find the dollar sign. There it was. The severance payment was the largest lump sum of money I'd ever received, yet I was already sweating over down-the-road mortgage payments.
So now I had big choices to make while reeling from the emotional punch of job loss. I was the primary breadwinner of a family of five. What was the best way to use my severance package?
Fast forward to six months later. Were the choices I made about my severance package in those early uncertain days the right ones? I asked Tracey Bissett, CFA and owner of Bissett Financial Fitness, for her insights.
Is My Severance Package Fair?
When you lose your job, there's enough to stress about without adding questions of fairness with your severance package. Consulting an employment lawyer – even for an hour – may give you peace of mind or expert advice on negotiating for more. I found a reputable firm that charged a flat one-hour consultation fee, got good advice and moved on. One step I wish I'd thought of: Bissett recommends asking your former employer if they'll cover your legal consultation costs.
How Much Money Are We Spending Month-to-Month, and Where Can We Cut Costs?
“One of the biggest money mistakes people make is underestimating how much money they're actually spending in a month," says Bissett.
I have a healthy aversion to debt, but I hadn't created a budget since my maternity leave, five years ago. My husband and I downloaded a budget spreadsheet and did the painful work of calculating our fixed costs, like property taxes, and finding savings in variable costs like childcare. We slashed the fun stuff, like cable and small recurring costs on my credit cards. Confession: I haven't tracked our actual spending each month against this budget as experts like Bissett suggest.
Should I Cash in the Lump Sum Payment?
Now I had a target monthly budget amount in hand. After my husband's salary, how would we cover the other costs? My severance package was a combination of two months' regular pay and benefits, plus an outstanding bonus payment and one-time lump sum. My gut reaction was to cash in the full severance payment but a hazy understanding of the resulting tax hit stopped me. I spoke with a financial advisor for the first time and changed course.
I ultimately invested most of my severance package into an RSP. I had the contribution room, which prevented a costly tax hit. Bissett notes: “Many people don't realize you may be paying taxes twice on lump sums – once as withholding tax when you get the payment, and often again when you file your taxes depending on your tax bracket. It's best to consult a tax professional before you make a decision."
In the heat of the moment, it can be difficult to think clearly, but if you're ever faced with an unexpected job loss, it's important to know all your options before making any big decisions.