Job loss after age 50

Job loss after age 50, what measures should you take?

From our experience with our clients, layoffs after age 50 are becoming more and more common. Such a situation can come as a significant shock, especially for people who have spent several decades within the same company and are destabilized by these new uncertainties.

Outplacement companies and also cantonal employment offices support those concerned to support their efforts to return to employment. But losing your job also has consequences on the organization of your assets and we therefore decided to publish this little “vade me cum” to help those affected get through this period with greater peace of mind.

1. Prepare for it first.

Installed in certain comfort for many years, you pay only average attention to your budget, your income covering your expenses. A drop, sometimes substantial, in income can therefore be a shock of great importance.  However, from the age of 50 your expenses could also fall: children will soon gain financial autonomy, part of your mortgage may have been repaid, large expenses for capital goods (car, household appliances etc.) become less frequent. However, certain circumstances can lead to an increase, typically divorce.

It is therefore appropriate to revisit your budget and on this occasion imagine a “worst case scenario“, because a well-constructed financial plan will provide you with a mental foundation that will strengthen your emotional stability, should a layoff occur.

From there, you may want to strengthen your savings. It will be your safety cushion in the event of an impact, but will also and above all be used to prepare for your retirement. These savings can be built up “freely” or through pension envelopes, with tax benefits which are generally considerable.

2. What to do when dismissal is announced?

Remember to check several elements: is the leave deadline respected? Is the dismissal coupled with the payment of severance pay? What is the tax treatment? What will your unemployment benefits be (be careful, these are capped)? How long does it take to access these benefits (particularly in the presence of severance pay)? Consider your accident coverage, because it expires 31 days after the termination of employment.

The tax treatment of severance pay was detailed in one of our previous letters. Below we recall the three cases where it is possible to mitigate its impact:

1. Compensation paid to the employee to fill all or part of a gap in future pension provision that appears as a result of the dismissal. If the conditions are respected, the compensation will be taxed at 1/5^eme the tax rate, around 10% on average in French-speaking Switzerland.
   1. Payment of compensation directly into the pension plan to fill the gap caused by the dismissal. The pension assets increase accordingly and the compensation is deductible from income tax.
   2. The dismissed person makes a redemption in their pension plan if a redemption reserve exists (which is often the case). The amount of this redemption is not linked to that of the compensation but remains tax deductible (tax gain by compensation).

Attention : in all cases, these actions must be implemented before the end of work relationships.

3. What to do in the following months?

The first shock has passed, you have taken all the emergency measures, more strategic reflections can begin. Before starting on this path, it is worth remembering two seemingly trivial, but still important, rules:

• The organization of your assets will depend on your resources and your choices, whether they are determined or made.
• At 50, you will still experience 10 to 15 years of professional activity, followed by 20 to 25 years (or more) of retirement!

Therefore, it is imperative to integrate the financing of your future retirement into all the plans that you can put together for your professional future in the short and medium term. These plans are as numerous as there are individuals, however we have chosen to group them into four categories:

1. Return to salaried employment : what salary level can I expect? What is the minimum level I need? What is my room for maneuver? Don't forget to check the strength of your future employer's pension fund (see our June 2021 letter on our site's blog on this subject).
2. Accession to independence : it's decided, you're going to become your own boss! This choice, however, involves even more uncertainty than in our first scenario: what will my income be, from what point can I hope to generate it, what are my options in the event of failure. In such a case you will need to write a financial plan for your business and another for your personal situation with, ideally, also a fallback solution.
3. Long-term unemployment : an option a priori reserved for those who are close to early retirement age, this approach generally involves a very sharp drop in living standards. Therefore, you must carefully plan your budget, sometimes with consumption of your savings until you retire early.
4. Early retirement : in Switzerland the law authorizes you to take early retirement from the age of 58 within the meaning of the LPP. For the AVS the rules are different and only two years in advance are possible in relation to the legal retirement age. And what's more, you will have to contribute to AVS contributions even if you are already “retired LPP”.

In any case, it is appropriate to develop a financial plan for the long term, that is to say including the phase of life including your retirement: even if in “real life” things will be different such a plan will allow you to control the relevance of your choices and ensure the proper implementation of optimization measures.

Regarding the future of your pension assets (“benefit of free passage“), certain rules must also be respected here:

1. First of all, check whether it is possible to remain affiliated with the provident fund of your future ex-employer, with or without maintaining savings contributions. The law now provides for this possibility for anyone aged 58 and over and some funds lower this threshold to 55. This approach allows you to continue to benefit from a much higher conversion rate than if you opted for free passage, many foundations allowing no other possibility than a capital outflow. This will keep you in a prudent management approach, likely with lower returns on capital than would be obtained in a vested benefits deposit. It is therefore a choice which will depend on your objectives and your personality in the face of the risks of the financial markets.
2. In all other cases you will open one or more vested benefits accounts. The law allows the opening of two vested benefits accounts per exit envelope (typically, if you had two different pension plans you could open up to four vested benefits accounts). The advantage of this approach lies in the possibility, under certain conditions, of transferring only one of the two vested benefits accounts to the fund of your next employer. In the long term and at over 60 years old, we can also consider exiting at different times between vested benefits accounts, in order to benefit as long as possible from the tax advantages offered by these envelopes, the tax treatment being however very different from one canton to another. Finally, opening several vested benefits accounts allows you to apply different investment strategies, which can only be determined with the help of robust financial planning and a real assessment of your own circumstances.
3. Choose your carefully investor profile for your vested benefits envelopes. And don't give in to the sirens of promises of performance that your interlocutors could make. Investing in the financial markets requires great discipline and your profile essentially depends on three elements:
   1. The resources you also have available to finance your lifestyle
   2. Your real-time horizon, that is to say the time you have before having to call on your vested assets to finance your lifestyle
   3. Your emotional sensitivity to shocks in the financial markets. Financial markets always fall faster than they rise and during acute crises you will see your savings erode at a rate which can be several thousand francs per day. The consequence is that you risk “cracking” at the worst time, with the decision to “sell everything” to escape the pressure, with the consequence of locking in your losses and depriving yourself of any possibility of further capital gains.

Don't underestimate the importance of one investor profile adapted! This involves managing your risks but also managing your expected returns. And the majority of investors underestimate the importance of compound yields over a long period of time, as we illustrate below:

• Capital invested for 15 years at 1% will have increased by 16% at maturity.
• Capital invested for 15 years at 2% will have increased by 35% at maturity.
• Capital invested for 15 years at 5% will have doubled at maturity!

Therefore, the choice of your profile must be the subject of particular attention. Ideally it should be supported by a financial plan detailing your cash flow needs at different stages of your life, such as those we carry out at Impact Financial Engineering.

We can distinguish 2 scenarios generating different profiles:

1. Objectives of rapid return to employment: favor “cash” solutions or very defensive approaches. Remember that you will not choose the moment of disinvestment, because the latter will be conditional on your arrival with a new employer and therefore the transfer of your assets to the new pension fund. If you lost money during the job search phase, your assets will be reduced accordingly. The returns offered by the new fund will likely be lower and consequence one is a reduction in your resources in retirement.
2. You opt for independence: the possibilities of organizing your pension will then be multiple and, depending on your resources and your needs, you will be able to seek higher returns. This decision must, however, be supported by a rigorous dual financial plan. The first for your future business and its business model; the second for your private financing, particularly beyond retirement age.

The opportunities and decisions to be made are numerous and complex. It is appropriate to seek help from a professional with the technical expertise, experience and independence to offer you solutions that will truly be adapted to your circumstances and your objectives. Do not hesitate to contact us at contact@impact-fe.ch