3 Ways Being Unemployed, Underemployed and Underpaid Derail Your Retirement Plans

Happy_Retirement by Thomas8047 on Flickr
Happy_Retirement by Thomas8047 on Flickr

No one wants to find oneself unemployed and without a steady salary. The lack of gainful employment is a frightening scenario. How long will unemployment last? How much money is there in savings? What about the bills? What will be paid and what will fall to the wayside? What luxuries have to be cut from the budget? All of these concerns can come rushing at you like a tidal wave threatening to drown you. The consequences of being unemployed, whether it is for the short-term or the long-term can impact your financial future. The same is true of underemployment and under-compensation.

I’ve heard this story too many times, and I’m sure you’ve heard it, too. A woman was denied unemployment benefits and it took her nearly a year to land a job. When she did land, she settled for part-time work while she continued to search for a full-time position. To get by, she dipped into her savings accounts and borrowed money from her 401(k). At first she tried to keep up with her debt, but as the months passed, it became harder to make ends meet. Her house went into foreclosure because she stopped paying her mortgage, she let her credit card bills go, and eventually she had to ask her adult children for financial help. Her situation gradually improved as she found full-time work and made arrangements to save her home and repay her debt. That said, her financial future has gone awry, and it will take a lot of work to recover what was lost. Is there a way she could have avoided her unfortunate situation?

Yes, there are consequences to being unemployed, but there is also a solution. First, let’s dive into how unemployment can affect your finances and your future. Then I’ll discuss the solution and why an investment in your job search can save you tens of thousands of dollars.

  1. The short and long-term financial impacts of being unemployed without a salary:

When you’re unemployed, you may receive unemployment benefits. These benefits help stave off the immediate concerns of your day-to-day expenses. You temporarily have enough cash to keep the lights on and put food on the table. While you’re out of a job, you can focus on making ends meet. This means you’re no longer contributing to your savings and retirement accounts. Worse, if you’ve run out of unemployment benefits (or you were denied them), you may have to draw upon your personal savings and retirement accounts. If you spend savings before landing a new job, it may be tempting to live on credit. As time passes, the consequences become more severe.

The long-term effects of unemployment can be devastating to your psyche and self-confidence. The toll on mental health are particularly notable. A sustained loss of income can create stress, anxiety, and depression as a person moves from a higher socioeconomic status to a lower status. Depression can also make you physically sicker by increasing the chance of a heart attack or stroke. Furthermore, job seekers suffering from an increased toll on mental health who had been unemployed for more than 12 weeks had a 70% reduction in their chances of finding a job, versus job seekers who weren’t suffering mentally. Long-term unemployment can also mean that you slowly drift away from your former co-workers and others in your personal and professional networks. A weak network makes it harder to find employment.

On the financial front, long-term unemployment can decimate your retirement funds and send you into a debt spiral. It isn’t uncommon for unemployed older job seekers to borrow against their 401(k) plans to make ends meet. Borrowing against a savings plan, or drawing from your personal savings means you’re pitting your present against your future. In other words, you feed your family today, but your ability to retire comfortably, or at all, is greatly diminished. The longer you’re unemployed and in debt, the harder it is to escape. As some bills are left by the wayside and go into collection, credit scores can drop, unpaid debt goes into collections, and lawsuits are filed. When someone in debt finally obtains gainful employment, they may find their wages garnished by creditors. Some may also discover it is harder to find a job because some background checks include credit checks.

No matter what unemployment situation you find yourself in, the anxiety can be overwhelming and lead to decisions based on fear. That leads to my next point…

  1. Opting for underemployment:

When we are staring into the abyss, there is a powerful temptation to latch on to the closest lifeline. A temporary job, a part-time job, and even accepting a pay cut may provide you with immediate income, but these employment decisions can be harmful in the long run. I wrote about it in my article “How Fear Limits Careers.” Not only are you accepting fewer dollars and benefits than what you previously earned, but it becomes harder to catch up on your salary, savings and retirement. Being underpaid means the majority of your income is going toward paying your current bills and keeping your head above water. There may not be enough money left over in your budget to consider fully investing in your future at the levels you need in order to retire when you want to retire with the quality of life that you’d expect, want and deserve. If you’re a few years away from retirement, it may even be tempting to retire early at the cost of receiving lowered social security benefits. It may seem counterintuitive to wait on a higher paying job if you can immediately land a job that will bring in income, but you are better off waiting for higher pay. Don’t settle for less than what you previously earned.

Once you do secure a job that provides you with your net worth, you can focus on paying your bills, getting out of any debt you may have accumulated and planning for retirement. And, there are ways that you can catch up for the times that you were not able to save, but it isn’t easy.

  1. Your financial plans for retirement:

If you’ve experienced a bout of short-term or long-term unemployment, the year you plan to retire has to be readjusted based what you can contribute. Most people haven’t planned far enough ahead to consider at what age they’ll retire and how much money they will need. In fact, ignorance seems like bliss-until you find yourself a few short years away from retirement. You realize you want to spend more time with your grandchildren, prepare yourself for assisted living centers (like Chelsea Senior Living – respite care Belvidere, NJ, for example), or you may even want to travel. Not being prepared for retirement means you’ll have to spend longer working or get by with less income. Before the day of retirement comes it is worth your time and effort to consult a financial planner. They can guide you through the entire process. The best part is that they can help you make a concrete decision regarding the expenses after retirement. It is possible that they will bring to your attention situations that might occur during your retirement that you may not have previously considered. Consider, for instance, moving to a retirement community (for more information on this, you can visit https://55next.com/page-new/all-communities/on-top-of-the-world/). You might not have considered this before as a result you have not thought about the financial implication this would have if you were to actually relocate. However, upon approaching them you can finally think about this option as well. Besides this, there are many other questions that may cross your mind when you speak to a financial planner, all of which could be enlightening.

That said, some of the questions are:

A. How has being unemployed affected my retirement funds?

If you take money out of your 401(k) before the age of 59, you’ll have to pay taxes and penalties on the amount withdrawn. You’ll also miss out on tax-deferred growth you could have been earning.

B. What strategy do I need to utilize to get my retirement funds back on track?

Once you do successfully land a job, you’ll need to recover the retirement funds you lost. That means calculating your expenses ahead of your retirement years, putting away as much money as you can from each paycheck, depositing more money in your retirement accounts and scaling back on expenses. MoneyRates.com has an excellent six-step plan for workers over 40.

C. Will I be able to retire at the age I want when that time comes?

If you take the time to calculate how much money you need to retire and the age at which you’d like to retire, you may have to rethink your plans. It may not be feasible to retire at 62 based on your funds. Instead, you may have to wait until 65 or older.

A financial planner can help you work out a new retirement year based on what you can contribute. But they can also help you determine how much income you really need in order to catch up or retire on time. This is a critical number to have! I don’t know how or why people ever make career moves without it.

Once you have a retirement plan in place that accounts for your lost income, you can go forward with those plans. You may discover you have to make a few short-term sacrifices such as buying a new car, going on vacation every year or even delaying a few home upgrades. (Just make sure you set some money aside for emergencies.) The temporary pain of having to cut back will be worth it when you can afford the retirement you want.

Now that we’ve raised your blood pressure giving you the scary truth, let’s talk about what is in your power to do about it. Hiring a career coach can help yield results from your job search much faster than searching alone. Think of a career coach as an investment and landing a job that pays you what you’re worth as a return on your investment. There is an accepted theory in the field, and I’ve never been able to locate the source, that calculates that job seekers can expect to be in transition one month for every $10,000 worth of salary. Based on this formula, we have helped our clients cut the length of their searches by 50% on average. With a focused campaign that is built upon a powerful personal brand and fortified with an effective social media strategy and activity campaign, you can regain control of your job search. That means creating bidding wars where employers fight for your talent, choosing your employers, earning what you’re worth, and accelerating your income. Our ROI calculator can help determine if you can afford to use our services.

Even if you ultimately don’t use our services, I still strongly suggest working with a career coach. You may have to put money upfront to give your job search the momentum it needs, but it is an investment that pays off in the long run, as long as you choose the right one! If you know of someone who landed swiftly, ask him or her if they used a career coach they can refer. Otherwise, do your due diligence.

Using the services of job search professionals may also be tax deductible, meaning you could regain some of the money you spent on those services. (Check with your CPA to verify. Certain conditions need to exist.)

There are consequences to being unemployed, underemployed and/or underpaid but don’t let fear and desperation guide your actions. An investment in your job search will pay off in the long run when it is invested wisely. Just imagine triumphantly returning to work earning the same salary as before you were let go, or an even higher salary. Imagine being so desirable that employers bid on your talent and you can work at your company of choice. You may have lost some ground on your retirement and savings, but with an accelerated income, you can recover.

We’re here for you if you want to sample our services with a free résumé and campaign evaluation: info@epiccareering.com

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