What to Do If You Are Laid Off: Fundamentals of Investing

Welcome again to our Fundamentals of Investing series. These videos are designed to explain important financial concepts you need to know as you grow your retirement nest egg and build your personal wealth. I'm Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, thanks for joining us.

Thank you, Brian. This is an exciting topic and I'm happy to be here.

Yes, Nolan, this is an important topic. Here we are in September of 2022, uh, economy is weakening a little bit and we're starting to see a bit of downsizing in corporate America. We're seeing persistent inflation and a slowing economy, and so companies are definitely taking action. We wanted to make a video to help executives and other corporate employees who might be facing the unfortunate circumstances of a layoff. Hopefully we can answer the questions that are on your mind if your company is starting to downsize And of course, we're able to discuss more deeply if you have something else you want to cover. So definitely give us a call or reach out to us if you want to learn a little bit more about our thoughts on how you can handle a difficult situation like a layoff. So we'll just jump right in, Nolan. First question is a simple one. What should folks do if their company is beginning to downsize?

So the first thing is not panic. I imagine for some people it's a blessing in disguise. You know, there was an article in The Wall Street Journal last week about quiet quitters. These are people that have just been showing up for work, but they've been kind of mailing it in. And if you take a look at companies that are laying, laying off, so far what we've seen has been weak companies that have been laying people off to preserve margin or for whatever reason. I don't know, maybe some people are going to be excited that they get tapped on the shoulder. So the first thing that they should do is not panic. Take stock of their situation. From a financial perspective, though, we think that there is some work to be done. So if you have an investment advisor or financial advisor that you're working with, it's probably a good time to seek them out. If not, we're happy to, to help.

That's some good general advice. Let's just jump into a few specifics and hopefully answer a few questions that are coming up for folks that I think were going to be common to most of the people in this situation. So the first one is stock options. Nolan, of course, A lot of people have stock options, restricted stock units, and a number of other employee purchase options for stock. Can you talk about how vesting for these people works when the layoff happens and what are the pitfalls and opportunities that come along with that?

So that's a big one. I'm going to try to chunk it up and see if I can handle them all. There are opportunities and there are also opportunities for pitfalls. So you want to be careful. The way the vesting works is Typically, I think the most common one in America today is either a 3 or 4 year. Let's assume it's a 4-year vest. I get a— and some sort of award, either a stock option or restricted stock unit. They give it to me year 1, and then a 4-year vest, it may vest 25% per year. And depending on where I am in that vesting schedule, when I get tapped on the shoulder to lay me off, that will determine how much of that stock or stock option I actually get to keep. And it'll be interesting. One of the things that we think about, there is some negotiation that can happen in a lot of cases when these downsizes happen. And it may be worth going to HR and asking them if they can either accelerate your vesting or allow them to invest on their own schedule, even though you may be terminated before the, the vesting happens. Certainly, there's definitely some action to be taken. I would say to the extent it's an option or stock position where you have choice on when you exercise that option, that'll determine from an income tax standpoint how beneficial it might be for you. So remember, every year your tax bracket moves according to how much income you have in that year. So if it's a year where there's an event, a liquidity event where you get either a lump sum severance, which we're going to talk about later, or a lot of stock that vests, that could push you into a higher tax bracket. Here we are in the fourth quarter. So from a strategy standpoint, it may make sense if I can delay either taking my severance to the first of 2023 or defer some vesting or selling stock and that sort of thing. There's some risk to the stock thing because we don't know where the market's going to go, but it may be worth planning to see if it makes sense to push that into the first quarter of next year.

Okay, great. And we also have a video on employee stock plans. So if you want to learn a little bit more detail about that, I will link that video for you here. And then I want to get into a little bit more of the details here of what you mentioned with severance. Nolan, can you talk a little bit about maybe lump sum severance is one way some people are paid out, others are paid out over a 52-week period. Can you explain the difference between the two and then sort of how that can impact your taxes? For 2022 and 2023 or whatever year this might be.

This is something that executives are certainly going to want to think about. If HR comes to you, it's generally going to be with some sort of severance in exchange for you waiving your, your rights to come back to them and sue or take some legal action. You may have the opportunity to either take a lump sum severance, which a lot of employers will press, Or sometimes they'll just continue your pay on a normal schedule for a number of weeks. And I think in the example you used, they came to me and they said, Nolan, I'm going to give you one year's worth of your salary, pay it out on its normal schedule over the next 52 weeks. Other employers will come and say they'll give you 52 weeks of comp, but they want to give it to you in one lump sum and be done with you. The tax— what happens to me from an income tax standpoint is going to be different in both cases. In the case that they give me a lump sum. And again, here I am in Q4, that could put me into a much higher tax bracket this year. So if that happens to me and I have restricted stock units that they're going to accelerate invest and I have stock options that I need to sell or exercise, again, that could put me in a much higher tax bracket and I get to keep less of each dollar. However, if I have the option of spreading those over multiple years, it's likely that I can keep more of that money because I'm giving less to it and Uncle Sam in terms of tax payments is very important.

Okay. And then another tax question, Nolan. So if you do have to take the lump sum in this year and next year, maybe you're not working for the first few months. One of the concepts we're always talking about is Roth IRA conversions. That's another video we've got in the series if you want to check that link out. But how do Roth conversions fit into this picture? Say if you have a year where you may make a lot less money than you're used to making?

This is another really important concept, and it can be a very strategic wealth builder for, for a lot of executives. And so that's why we say all is not lost to the extent you're getting downsized. First, we're going to let all the viewers know we are not accountants here or CPAs. And so do not consider this tax advice for any of these strategies. We encourage you to talk to your financial professional. Your tax professional before you take action. So let's get to it. In terms of IRA accounts, we have two types. We have normal IRAs, which we call tax me later and get a tax deduction upfront. Normally for an IRA or 401(k) contribution, eventually the money has to come out and so I'm taxed later. In that case, Uncle Sam is your partner for a while until you buy him out. We also have the tax-me-now plans, which are called Roths, and I can do a Roth as an IRA or Roth 401(k). I don't get a deduction today, but the money grows deferred. And as long as I make a qualified distribution, all of that happens on a tax-free basis. The reason that most executives don't have a lot of money in Roths is they make over the limit that qualifies them to make a contribution and if I have a situation where I have a liquidity event where I'm being separated from service, in that case I could have a down year for income. So imagine my tax bracket's been at 37%, but I'm going to have a year where either I'm going to have a partial year of income or maybe a considerable time where I don't have income. It could be the case that I dropped to the 22 or 24% bracket until I go back to work in my next opportunity. And for a lot of executives that, that earn a lot in that high tax bracket, this could be the one opportunity between now and retirement where they really get that trough from an income tax bracket. We like the idea of thinking about using that trough to do some things from a tax perspective that can improve your situation. And one of the things to think about is a Roth IRA conversion. To put it in quite simple terms, imagine I have $100,000 in a regular IRA. and that's in my left pocket. I like to convert that to my Roth and move it to my right pocket, or the amount I make won't hold me back because anybody can convert. But remember, the $100,000 in my example that I'm moving is taxable on my 1040 at my marginal tax rate. So if I'm doing it and I'm at the 37% rate, it may cost me $37,000 to move $100,000. However, if I do it in a down year for income, and I'm in a 24% bracket, I possibly could, could move $100,000 and it cost me $24,000. So a lot less. And then the cherry on top is if I convert and it's at a time when the market is down and then subsequently it's a trough year in the market and the market goes up much faster in the future as it recovers, I get a double bonus. So certainly a strategy we think worth considering.

Excellent. And then we got a couple more, Nolan, and these are really important. So obviously a lot of people have very generous benefit packages at their employers. Part of that might be life insurance. And I know a lot of people just have the life insurance at their job. Can you speak, Nolan, to, to those folks? What should they do when they, when they're laid off?

So they definitely want to take action. And I would say sooner rather than later. You're right. Just about every executive is going to have life coverage at work. And it's something most people really don't think about. Until much later in life. And we like to think about it right up front because whenever you change employers, your life insurance terminates. Um, and, and so it goes away. Think about those being group term plans. We think there's a case for most investors to own permanent insurance not tied to work, and it protects not only income, but generally later in life if you have a financial inheritance that you'd like to protect, or you have legacy wishes, maybe not for your adult kids, but probably for grandkids once they come along, then these permanent insurance plans can be crucial. And nowadays we're actually doing them where there's a long-term care attachment attached to them. And so we like to own the policy and we like it to be in the safe. The trick with life insurance is you really want to get it when you're insurable. You know, at some point we always like to say you're going to go to the doctor and you're going to hear something and see something, and at that point your desire to get insurance is going to go up, but your ability to get it is going to go way down. And so we like to secure those life insurance plans, and that way, to the extent you move from Job A to Job B, it's not such a big event. So we encourage people to look at that as well. All right.

Thank you, Nolan. So there's a lot to think about if you're facing a layoff or if your company's downsizing, you think you might be facing that situation. Nolan, how can a financial professional or how could we help someone in this situation to sort of navigate these waters?

Yeah. So being an independent fiduciary, we can sort of sit down, not only run the financial models, but also talk about the, you know, the non-financial, the psychological impacts of this as well. But there's another sort of investment angle I think people need to think about as well. Usually if you're an executive that have been around a while, you're going to have a large portion of your net worth tied up in the company stock. What we've seen early so far in this recession is the companies that we've seen that have made the headlines that are laying people off are really in this technology space. And it's not unusual to see an investor that works for one of these high-growth technology companies not only have a large part of their net worth in the company stock, but generally speaking, if you take a look at the portfolio, it's not unusual to see a lot of other technology names in the portfolio as well, because that's what the investor's comfortable with. And so there could be a diversification issue here that needs to happen as well. And what's really likely is if you've built your skill set in technology, it's very likely you're just going to go from technology company A to technology company B. So you're going to continue to have a large exposure not only in company stock, but your future income. Does it make sense to plan your other portfolio around other sectors, not technology-related, and some that we like, like energy, that a lot of times move in the exact opposite, that can complement technology holdings very well. So we think it's really a good time to do a comprehensive portfolio review and review your goals and objectives.

So to sum things up, Nolan, if you're facing a layoff or downsizing, it may be difficult, but but not all is lost. There's opportunity maybe to take advantage to improve your tax situation. But the important thing is you must take action now, handle a lot of the things that are going on in terms of your, your company benefits, your company stock, your company stock options. And a financial professional can really help you navigate these waters and make the right decisions at a difficult time. So we're going to put our information down below in the show notes. So if you need someone to talk to, or to consult with in order to handle some of the difficulties that come along with downsizing, don't hesitate to reach out. We'd be happy to help. Thanks to the viewers and thanks, Nolan, for being with us.

We'll see you soon.