How to Bulletproof your Finances from Sudden Unemployment or Transition

unemployment jackie porter certified financial planner and financial advisor in toronto meet jackie

No one wants to hear the words “It’s over”- especially from their employer. For many people, the relationship they have with an employer will be the longest relationship they will have in their lives. According to Business Insider, during their lifetime, the average worker will spend over 90,000 hours at work. Consequently, it can be a very large blow to the ego, to hear that this relationship is no longer valued or wanted, often after many years. If you are going through unemployment or a career transition, the important thing is to work with an advisor who can ask you thought-provoking questions, to help you to think through the implications of decisions you will make at this crucial time in your life.

  • Consider retaining the services of a legal professional who is familiar with the implications related to the termination of your employment.

Employment lawyer, Lambert Boenders, warns “against signing off too quickly on a termination letter, no matter how tempting it may be in the moment to do so”. When an employee feels that a termination was unexpected, there may be an initial shock period. This can be especially true in a downsizing situation when an employee may be tapped on the shoulder for no particular reason. Feelings of anger, guilt, and the surprise element may lead them to want to sign off on a termination and final settlement and release letter “just to get it over with”. According to Mr. Boenders, the key is to take the time to speak with someone who is familiar with their options to determine whether or not the settlement being offered is being fair and legal based on Employment Standards Legislation.

In addition, if you are facing transition, be sure to get a copy of your Record of Employment (“ROE”), so that the paperwork can be filed with Employment and Social Development Canada as soon as possible. A Record of Employment lets the government know the reason for the employee’s termination, and also helps to identify when you may be eligible for EI benefits, after termination based on your ’
severance package. Keep in mind if your were terminated for “cause” you would not be eligible for employment benefits, which is why the employer needs to accurately document the reason for termination on the ROE.

  • Work with an advisor who can help you to understand how your severance package will be paid and what options for allocating the payments may be available to you.

Is there a severance and will it be paid out in one lump sum? Will some of the severance be paid now and the remaining paid after a period of time, say 6 months? Will some of the severance be contingent on not finding another job? Will it be a working notice termination? Will the severance package delay eligibility for employment insurance? All of these scenarios will require different contingency planning strategies for a person facing sudden unemployment or transition. For example, a person receiving a lump sum may prefer the payment to be spread over 6 months. This may allow for the income to be split between two tax years and ultimately reduce the overall tax burden on the actual settlement received. Especially if they are unable to secure work in year 2, the ability to split settlement funds between two tax years may mean more money in their pocket since they would not have to pay taxes on their regular income and their settlement, as they would have been the case in year one.

  • Learn how classifying your severance as a “Retiring Allowance” can help you to reduce taxes paid on the settlement.

If you have worked for your employer for many years and are currently being downsized, you may be eligible to “roll over” funds from the settlement into an RRSP without reducing your current RRSP contribution room. For example, if you worked at the company before 1996, you would be eligible to receive$2,000.00 as a “retiring allowance” for each year of service. You are also eligible to receive an additional $1,500.00 for each year of service before 1986. A retiring allowance can be a useful tool for an employee with long service to defer taxes on their settlement while maintaining their own RRSP contribution room for other tax planning opportunities. Keep in mind that that funds being rolled to a retiring allowance are not tax deductible, but will continue to grow tax deferred until withdrawal.

  • Now is the time for you to take stock of your insurance needs and confirm when your life and health plans will expire.

What is your family situation and current state of health? What type of coverage is currently available to you at work? Have you taken advantage of medical benefits available while they last? For example, now may be a good time to book that last dental checkup (for yourself and your family) to ensure problems are identified and addressed while there is still coverage in place. You may also want to investigate the costs of converting your existing health and life plans to individual plans, especially if there is no other coverage in place, and you are in poor health. Life insurance plans offered at work can be converted to an individual plan without a medical test as long as this is done within a certain period after your termination. An often-overlooked benefit, especially for clients who are the main breadwinner, is disability coverage. If the main breadwinner becomes disabled while they are out of work, it could be financially disastrous for the family.

  • Determine what will need to be done with your group retirement or pension plan. Carefully weigh your options.

The options available range from:

  1. leaving the retirement funds with their employer,
  2. transferring the funds to a new employer,
  3. transferring the funds to locked in retirement account managed by the client, or
  4. transferring the funds to an annuity plan with an insurance company.

Details to consider when making a decision on the options available include: Were you participating in a company sponsored pension plan? Was it a defined contribution or a defined benefit plan? Typically, you will have 90 days to make a decision on what to do with your retirement benefits. It may be an easier decision to move a defined contribution plan to locked in retirement account where there are no guarantees associated with the future pension income by your former employer, versus a defined benefit plan where income and inflation protection may be contractually guaranteed.

You may be out of pocket if the projected return is not achieved by the investment you switched to versus what would have been accomplished in the guaranteed pension that was offered with the former employer. Ask your investment advisor to provide you conservative rate of return expectations for comparison purposes, to avoid problems later on.

Also, if you have a defined benefit plan that is going to be paid out in a lump sum, sometimes not all of the benefit is eligible to be transferred to an RRSP. This is when it becomes useful to have unused RRSP contribution room or to be eligible for Retiring Allowance to reduce taxes paid on lump-sum payments to employees.

  • Prepare financially for the transition by working with an advisor who can help you to map out your current financial circumstances in detail.

For example, how much do you need to live each month? Do you have a budget? How much debt are you in? What is the your credit score? Can you access low interest financing for current debts such as a consolidation loan or a home equity line of credit? How long could you live on your severance based on current lifestyle needs? What expenses can be reduced at this time? What major purchases can be delayed? This an important time for you to understand your financial circumstances and devise a plan to take control of discretionary spending and interest costs as much as possible. This is also a good time to consider strategies to boost income such as starting a home-based business, taking on part-time or consulting work, or creating rental income from extra space in their homes to name just a few strategies. Because of companies like Airbnb and Uber, there are a lot of opportunities to create part-time income like never before.

  • An online CBC news article posted in June of 2016 predicted that 42 percent of jobs in the marketplace are at risk of being automated. This means the prospects of being downsized because of technology are very likely in the near future. Are you prepared for this potential “new normal” in the labour market? Are you ready to bulletproof your finances from any employment transition you may face in the future?

The data suggests that we are in a period of rapid change. To fully prepare for any future job insecurity, you must be willing to take personal responsibility for your own career development like never before. Get involved in your industry’s professional associations, whether or not your employer pays for it. Commit to lifelong learning in your profession and to thinking like a consultant even when working in a full-time position. Maintaining a social media profile such as LinkedIn, is an important tool for you to promote yourself and make contacts for the next career move, even after securing employment.

In this day and age, there is no way to predict when the next “tap on the shoulder” will come. The best way to bulletproof your finances from unemployment is to embrace uncertainty by planning ahead and managing what you can control.


If you don’t have a financial plan to bulletproof yourself from unemployment and would like to take the reins on your finances, book your complimentary 30-minute consultation session with our team!

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