In today’s economic environment, severance and early retirement programs are becoming commonplace. Whether you are employed in either the private or public sector, it seems that no one is safe from downsizing, or becoming “redundant,” as companies and provincial governments struggle to meet the demands for profitability and budget constraints.
If you are offered a termination incentive or severance package, what should you do? You should seek advice to help you evaluate the offer and consider the effect it will have on your life. In many instances, you may not be in a state of mind or have the knowledge to deal with all the issues. It can seem like an overwhelming task, but there is help available if you know where to look.
A qualified financial planner can help you, and is in a position to work with, and refer you to other professionals such as accountants, lawyers, bankers, and career transition consultants. Although you may not have required the services of these professionals in the past, it is important in to utilize their services now – it could optimize your severance.
The offer involves other decisions beyond severance, such as benefits replacement and pension considerations. Your financial planner should help you assess the package and address the following issues:
Impact on your family – The “bruise to your ego” can often be a difficult thing to deal with. Financial issues and income uncertainty can be a challenge, especially if you may be facing post-secondary education costs for children and other large continuing expenses such as a mortgage. The impact on your spouse, especially if they are continuing to work, should be addressed.
Assessing your current spending habits – You should complete a written budget that will assist you in tracking your current monthly expenses and give you a better idea of what you require to live on each month. It’s also an opportunity for you to consider changes that could be made to your spending pattern. You may decide to impose some spending restrictions and consolidate debts to reduce interest costs.
Tax planning – Because you may be receiving a significant lump sum payment, you need to minimize your taxes. A review of your RRSP contribution limits and use of the “retiring allowance” rules will allow you to defer much of the income tax. Your spouse may have unused RRSP room that could be utilized to reduce the family tax bill. In addition, many employers will allow you to have the payment negotiated over two tax years. Proper planning in this area is essential, as some of these tax-planning opportunities will only be available during the year of severance.
Review all income sources and assets – Once a budget has been established, a review of your potential income sources and assets will help determine any shortfall in your income requirements. Your spouse or partner may have an income to cover the expenses, or you may have other assets such as RRSPs or savings that can be used to produce income. Government benefits such as Canada Pension and Old Age Security should be incorporated into retirement income planning. It is also prudent to review your investments to ensure that they are invested properly, as your risk tolerance probably has changed as a result of your new status.
Group benefit replacement – Which, if any, of your employee benefits will continue upon termination? You may require personal health, dental, life, and critical illness insurance coverage to replace benefits that you previously had as an employee of the company. 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 dependent under your spouse’s group plan for benefits such as health, dental and life insurance, if they have coverage with their employer. Some coverage, such as disability insurance, will be discontinued because you no longer are employed.
Pension Considerations – This could be one of the most important financial decisions that you make. You need to ensure that you understand your pension choices, because the decision you make is permanent and cannot be changed after election. If you are going to begin drawing your pension, a discussion about the difference between a singe and joint life pension is needed and whether you want to have a guarantee or not, on future income. All the choices affect the income provided by the pension and need to be assessed carefully. If you are 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.
By using the services of a qualified financial planner, you should be able to ensure that you get the most out of your severance or early retirement package. They will help you develop a realistic plan that will reflect your personal situation and allow you to get on with your life.
If you have any questions be sure to give us a call (250) 953-6816