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You’re Fired: Now What?

Dealing with a big lump sum like a buyout or severance can be complicated. You have to deal with investment and tax issues along with job prospects – all at a time when you’re not at your emotional best.

You’ve been let go. Now what?

Whether it’s a severance payment as part of a dismissal package or a straight buyout as your ex-company downsizes, you’re likely in a state of shock and not at your judgmental best.

“My feeling is most of these people are not in a financially sound mindset,” said Heather Franklin, a fee-for-service financial planner in Toronto.

That can be problematic because you’re going to have to have a close look at job prospects, your debt situation and tax implications. And this is likely happening at a time when you’re at your most vulnerable – right smack in middle age but too early for retirement.

And that means it is essential that you don’t do anything rash with that payment.

In fact, Franklin says the worst thing you could do is to think a big spending spree would improve morale.

That said, she is careful to say there is no one-size-fits all plan for dealing with these usually unexpected large payments.

First off, think about the tax implications of your sudden windfall. That extra several thousands of dollars in income could propel you into a higher tax bracket.

“Earmark funds to cover the income taxes at the end of the year because due to the additional severance package, the tax withheld by your employer may not be adequate enough,” she said.

Also, see if the employer would help minimize tax consequences by spreading the payment out.

“A lot of times, you can negotiate a severance package over a couple of years and that would be probably the best, tax-wise,” said Franklin.

“But it all depends on the employer and so you really have to examine the tax implications of the severance package as well.”

You also want to shelter as much of that added income as possible. So, take this opportunity to top up your RSP. And it doesn’t hurt to add to your Tax Free Savings Account. There is no immediate income tax break with your TFSA but gains on your investments will be sheltered.

Think carefully about where specifically you will put that investment money. This is not the time to think about veering into speculative investments in the hope of getting extra mileage out of that buyout or severance. Stick to the investment strategy you’re already comfortable with.

Next, your new situation will also force you to think about just how long it will take you to find another job. It could easily take six months. Maybe longer and maybe never.

So, if you don’t already have an emergency fund to pay bills for at least three months, it’s time to set one up.

“Definitely establish an emergency fund if you don’t have one – before debt repayment,” she said.

“For some people, three months is sufficient but my preferred time frame is six months.”

If you’re like a lot of Canadians who have been piling on debt because interest rates have been at historic lows, the next thing you will want to do is pay off some of that money.

“If they have no debt, that’s fine but if they do have debt it’s always a priority, always the best use of one’s dollar – and the best investment return,” she said.

“A lot of people say, `I’ll just invest the money,’ but if they have credit card debt at 20 per cent, they are much better off paying off debt.”