Financial Planning After Layoff: 8 Smart Steps to Protect Your Finances
- Lei Deng
- Oct 30
- 5 min read
Losing a job is tough, both emotionally and financially; even if you sort of saw it coming.
A layoff might pause your income temporarily, but not your plan.
Financial planning after layoff is more than just cutting your expenses back. It means making a clear plan to protect what you have and get ready for the future.
Here are the key steps you can take for financial planning after layoff with confidence.
8 Steps for Financial Planning After a Layoff
1. Pause Before Making Big Financial Decisions
A layoff can trigger panic. It’s tempting to make fast moves: cash out savings, pay off debt, or cancel investments, just to feel in control.
But in these first few days, the best move is to pause. Take time to understand your new financial picture before acting. Emotions can cloud your judgment and lead you to make choices that could affect you negatively down the line.
2. Calculate Your Financial Runway
Think of your cash as your runway: how many months you can sustain essential expenses without new income.
Start by listing your fixed expenses: housing, food, insurance, utilities, transportation, and debt minimums.
Then, total your available cash savings, checking accounts, and any severance pay.
Divide savings by monthly essentials. That number, your runway (or your "burn rate"), tells you how long you can cover expenses while job searching.
If you haven’t already, pause automatic investment contributions or extra loan payments to preserve flexibility.
Discretionary expenses can be adjusted during the layoff. However, cutting expenses doesn’t mean cutting joy. Good financial planning means that you can handle all that life throws at you with grace.
Keep one or two small “comfort” expenses that help morale, like your favorite coffee or streaming service. A sustainable budget is better than an extreme one.
Why it matters: Small, intentional changes add up and help you feel proactive, not deprived.
Planner's note: Create a temporary “lean budget.” Knowing your numbers helps replace uncertainty with calm.
3. Apply for Unemployment Benefits Right Away
Don’t wait to file! Unemployment benefits usually start from the date you apply, not your last day at work. Even if you received severance, you may still qualify, but state rules vary.
You’ll typically need:
Employer information and dates of employment
Separation reason (layoff counts as “no fault”)
Recent pay stubs or W-2 forms
4. Review Severance Pay and Employer Benefits
Before signing anything, review your exit documents carefully.
Severance pay: know whether it’s a lump sum or salary continuation; both affect taxes and timing.
Unused PTO or bonuses: ask if they’re paid out separately.
Stock options or RSUs: note vesting schedules and post-termination exercise deadlines.
Health insurance: compare COBRA, ACA Marketplace plans, and your spouse’s employer coverage. The lowest cost option is usually filing for a life event coverage change on your spouse's health insurance coverage.
Life insurance: review group life insurance conversion options. Some life insurance could be converted to permanent life insurance, although it could mean a big jump in premiums.
Planner's note: Keep copies of all HR documents and payment details. You’ll need them for taxes and future planning.
5. Plan for Taxes
One of the most overlooked parts of financial planning after layoff is tax
withholding.
Unemployment benefits are taxable, and they don't automatically have tax withheld.
Severance pay is usually taxed at a flat supplemental rate of 22%, which may be less than your actual tax bracket. That means you could owe more at tax time.
Unemployment benefits are also taxable, but withholding isn’t automatic unless you elect it.
To stay ahead:
Set aside 10-15% of your severance income and earmark it for tax payment if you’re in a higher tax bracket.
Either file IRS form W-4V to withhold a portion, or set aside part of each payment and save it in a bank account or a High Yield Savings Account (HYSA) for taxes.
Track how much you receive and what’s withheld for easy reporting later.
Planner's note: A few of my new clients actually ended up owing taxes after a layoff in the previous year, which is very counterintuitive. A key reason is that they didn't withhold any tax from unemployment benefits; another main reason also includes low withholding from the new job after a layoff.
6. Protect Your Retirement Accounts
Avoid the temptation to tap retirement savings unless absolutely necessary.
Leaving your 401(k) with your former employer is often fine, as long as fees and investment options are reasonable.
Rolling it into an IRA can provide more control later, but avoid rushing that decision while emotions are high, since you might have to deal with pro-rata rule down the line.
Remember:
Early withdrawals trigger income tax plus a 10% penalty if you’re under 59½.
Unvested employer matches may be forfeited after termination.
Planner's note: Preserve retirement savings as much as possible. It’s easier to rebuild a job than to rebuild compounding growth.
7. Use a Low-Income Year to Your Advantage
A year with lower taxable income can open up unique tax opportunities:
Roth conversions: Move pre-tax retirement assets into a Roth while in a lower bracket.
Capital-gain harvesting: Realize gains on investments at 0% or 15% federal rates.
Adjust tax withholding or make estimated payments to avoid underpayment penalties.
These moves can strengthen your long-term financial position even in an uncertain year. These moves are better made towards the end of the year; especially if you're laid off early in the year. It's not unlikely that you find another role that could potentially make this year a higher-income year than before. I've written more about it here on how to turn a year of lower income into a great tax-saving opportunity long-term.
Planner's note: Cashflow is king! Even though it might be tempting to take advantage of lower tax brackets, make sure you don't sacrifice cash flow that can help bridge the period until you find your next income source.
8. Rebuild Structure and Get Professional Guidance
A job provides rhythm. Without it, days can blur together, and that can spill into financial inaction.
Create a daily or weekly structure: job search, networking, learning, and rest. Keep a simple progress log to track wins; even small ones count.
If you’re unsure how long your savings will last, how to handle severance or stock options, or how to plan next steps, consider working with a fee-only financial planner.
A planner can help you:
Stretch your savings with a customized cash-flow plan
Minimize taxes from severance and unemployment
Reallocate investments strategically during your transition
Closing Thought
A layoff may pause your paycheck, but it doesn’t have to pause your financial plan.
Actually, this is a time when you could stop from the daily hustle to focus on managing your financial life, aligning spending with your values, and cutting expenses that don't serve you, all of which can set you up for more future financial success. It's not an end, but the starting point of a new beginning.