With 213,000 Canadian jobs lost since October, many advisors have at least one client who’s been given the pink slip. Dealing with the laid-off investor requires more than just a few encouraging words and a quick look at the finances, though — a client loses a job, the advisor becomes part therapist, part financial planning guru.
“A lot of this is dealing with an emotional and upset client,” says Michael Berton, a Vancouver-based CFP with Assante. “They need someone to kick the tires and review their financial situation.”
Naturally, the first thing laid-off clients will be wondering is how to make their mortgage and other necessary payments. Before they go into panic mode, however, the advisor should sit down with them and carefully comb through their financial plan to see if in fact they need to do something drastic.
“When someone loses a job, cash flow becomes very important,” says Ted Rechtshaffen, president of Toronto’s TriDelta Financial. “You say, ‘forget everything else for period of time; will you be OK covering all your costs? And how long can you go without a job?'”
“Advisors have to get back to basics and confront brutal facts about the portfolio and where they’re at,” adds Patricia Lovett-Reid, senior vice-president with TD Waterhouse Canada. “Help them figure out their passions and strengths and get back to the life planning process. Most of the people will be all right, but you have to factor in that it often takes six months to find a job.”
There are two things a client needs to make the transition from worker to job seeker easier; a healthy cash reserve and a decent severance package. “Always keep a reserve; it gives you flexibility,” says Lovett-Reid. “It’s important for advisors to remember that cash is king.”
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• Advising laid off clients • Help clients cope with unemployment • Severance package options • Help laid off clients save on tax • Avoiding debt in trouble times |
She says the general consensus used to be that people should have enough saved to cover their living expenses for three to six months. Now, that number has jumped to nine months. “The job market is getting tougher,” she says, “and it’s likely to stay that way.”Even if your client hasn’t lost his or her job yet, you might suggest taking out a line of credit now in case the axe does fall. Berton says nervous employees should look at getting a secured line of credit while they’re still working because it will be tougher to get one without a job.
“If someone says their financial plan has gone haywire because they lost their job, using a line of credit is not a terrible thing to help them get through this, especially when interest rates are around 4%,” he says. “Some might want to switch their mortgage into a line of credit so you only have to pay back the interest.”
Hopefully, a good severance package will help pay the bills and stave off that line of credit debt for a few months. But make sure your client doesn’t accept the first offer his or her company makes.”The first offer is almost always not the best offer,” says Rechtshaffen. “What we want to do is find out if it’s reasonable or not. It may involve us connecting the client with a labour lawyer to give the offer a quick look.”
Once the severance pay is worked out, the next step is trying to get it in the most tax-efficient way. That might mean getting the money transferred directly into an RRSP instead of receiving non-registered and taxable payments.
That’s easier said than done, however. First there has to be contribution room in an RRSP — there isn’t, your client will have to take the money outside of a registered account. For people who have been working at the same company since 1989, there is a special RRSP contribution room — $1,500 a year — that can be used. If someone was at a company between 1989 and 1996, that extra room is $2,000 per year. There’s no benefit for people who have been at a company only since 1996.
The advantage of sticking a severance payment into an RRSP is that that money will be put in during a high-income year (salary plus severance) and can then be taken out as cash in a lower-income year the following year, while the client isn’t working.
“Technically, you can say I made $150,000 in 2008, and I got 46% refund on an RSP contribution,” says Rechtshaffen. “In 2009 the income is going to be $20,000. So if I draw money out of the RSP, it will be at a lower marginal rate.”
Another tax issue surrounding severance is when the cheque is issued. Someone taking a lump sum at the end of the year could be pushed into a higher tax bracket, so trying to see if your client can get the cheque in January, rather than December, could make good financial sense.
“Here’s an ideal scenario,” Rechtshaffen explains. “Someone gets fired in November 2008. The company pays the lump sum in January into an RRSP, and then the client can pull money out of the registered account in 2010 if they need it.”
Once the severance issues are settled, look at the client’s overall financial plan, which includes going over expenses and seeing where costs could be cut.
“What are their expenses? Is there some flexibility with the bank when it comes to the mortgage?” says Berton, outlining a few things advisors should think about. “What are other fixed costs? Can they sell their car for a while, or at least stop driving it and take the insurance off?”
While reining in spending is hopefully a short-term plan until the client finds a new job, if he or she is nearing retirement and gets laid off, finding a full-time gig could be a daunting task. So, taking a detailed look at the soon-to-be retiree’s financial plan is especially important.
“People these days are saying, ‘I thought I was going to retire next year, but now with the way the market is, I’m going to have to work forever,'” Berton explains. “As a CFP, my response is always, ‘How do you know? How do you know if you’re going to have to work 10 more years?’
“Let’s assume their work career is done,” adds Berton. “Sometimes people look at their finances and realize they have more money than they thought. The flipside is they thought they’d be fine if they retire in three years, but they’re not OK to stop work at 57. Again, it comes down to budgeting. Their retirement lifestyle might have to be dialled back a little bit. Maybe they can find part-time work since full-time may not be that easy to get.”
Clearly, there’s a lot of work for an advisor to do when a client gets the pink slip. It’s imperative that the planner stay in touch with the client as much as possible in the weeks after the layoff to make sure their plan is on the right track. While this extra attention might be a lot of work for the advisor, it’s bound to pay off when the client gets his or her life back on track.
“Times of major crisis are when an advisor earns loyalty for life,” says Rechtshaffen. “If they can be a rock for someone in a real time of need, that’s hugely significant.”
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(02/10/09)
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