My financial planning practice is a diverse one. Since 1995, more than 80% of my business has involved working with clients who have been laid off or have retired early. To give you an idea of the magnitude of my work, I stopped counting after my 20,000th client.
The short-term financial planning I do for these clients is not based on any formal training—everything I have learned has been through experience. This is mostly due to the urgency of the work involved. Long-term financial planning resumes once the client is back in the workforce. An advisor who can safely guide the client through a jobless period will have a client for life.
There are a number of critical areas our clients must understand if they are to make informed decisions. During career transitions, short-term financial strategy is more important than long-term financial planning. Clients need to know what they have to do to survive the financial and emotional upheaval they will endure in these periods of transition. The key concerns are cash management, taxation and tax deferral, benefit replacement, employment insurance, and pensions or company savings plans.
My job is to lessen fear and misinformation so the client can focus on finding a job rather than on finances. It is important to see your client as soon as possible after a termination. The timing of the intervention can make a huge difference in the client’s financial security. For the laid-off employee, not knowing important financial information can hurt in the short term and have lasting long-term consequences.
• Jobless clients need your help|
• Help clients cope with unemployment
• Severance package options
• Help laid off clients save on tax
• Avoiding debt in trouble times
This is usually the client’s first and most acute fear. The client’s key concern is how he is going to pay the bills. My experience is that most people do not know where they are spending their money. The most important question to ask is how much cash the client needs, and how much he currently has on hand. With the prevalent use of credit and debit cards, we have been mismanaging our way to financial hardship.
Clients need to understand what their priorities are and remove any spending that doesn’t contribute to survival. I ask my clients to do an analysis of where they have been spending their money. My role as a financial planner is to assist the client in putting a formal cash management system in place, or, if one already exists, to assist with fine-tuning the current system.
We first look at all debt being serviced by the former employment cash flow. Where severance is a continued salary, this arrangement still needs to be reviewed because this source of cash will end.
If the client is not re-employed at the end of her salary continuance, she will need additional funds before employment insurance (EI) commences and to supplement EI. Some of the questions that need to be explored are: Can the mortgage be re-amortized? Can other loans be serviced by interest payments only? Should we pay off the credit cards and lines of credit with the severance, since we can re-access them in the future?
We need to get spending down to a reasonable amount. We also need to ensure there is a small reserve of funds so the client and the family can have fun. This helps the client with much-needed stress relief.
Taxation and tax deferral
Taxation and tax deferral play a pivotal role in determining the availability of cash for the downsized employee. It is important to understand which components of the severance are earned income (reported on a T4), such as Employment Standards Code payments or salary continuance, and which are retiring allowance (reported on a T4A).
All employers deal with this issue differently, so you must read the severance letter to know how this money will be taxed in the client’s hands. Retiring allowances are taxed differently at source and therefore can be manipulated differently to facilitate the client’s financial survival through the transition.
We can use the client’s RRSP contribution room to facilitate a reduction in taxes held at source for the retiring allowance in order to increase the amount of available cash that the client can use to pay her bills.
By redeeming RRSP funds as needed, the client can stretch the severance to last a longer time for financial survival. The downside of using RRSPs to increase available cash is it creates a tax liability for the future, since severance payments and RRSP withdrawals are fully taxed, though they are taxed differently at source. The other downside is the permanent loss of RRSP contribution room. You must make the client aware of the pros and cons of these options so she can make an informed decision on which to pursue.
To learn about benefit replacement, click through below.