How To Prevent A Layoff From Destroying Your FIRE Plan

If you have a job at a high enough salary that you can save a high percentage of it each year, you can calculate how long it takes for that savings pool to eventually grow large enough that it equals years of take-home pay.

For example, if your net salary is $100,000, and you frugally live off of $30,000, you can bank $70,000 each year. Say that your salary just keeps up with inflation, so you save that net $70,000 each year. After 10 years, you would have $700,000, which at a 4% withdrawal rate could give you $28,000 per year, or almost as much as you need to live on.

Add to the $700,000 the interest and capital appreciation that accrues if you had been investing those savings over time, and you might hit financial independence in fewer than 10 years. Even at 10 years of working, that is decades shaved off a typical retirement age. (This example is about Extreme Saving and is just one of four strategies you can use to reach your FIRE number).

However, throw an unexpected layoff into the mix, and all of a sudden the elegant FIRE math stops working. The high salary disappears, so you can’t save until that’s replaced. If your job search takes longer than you expect, you may have to dip into what savings you do have, taking away capital to invest and the interest and appreciation that comes with it. This setback can destroy your FIRE plan.

One solution is to never get laid off. But no one plans for bad career news to hit them. Disney has increased its layoff target to 32,000 for first half 2021. 3M is cutting almost 3,000 jobs. Coca Cola is reducing staff by 12%. Multiple industries are impacted, and it’s not just large companies who are suffering. Over 163,000 small businesses closed in 2020.

It’s an unfortunate reality that your job can go away. A robust FIRE plan should include a plan for dealing with the threat of a layoff. Here are seven steps to take, some of which you should start right now, even if a layoff seems unlikely:

1 – Follow the news – at all levels

News at all levels means the overall economy down to your particular department. There can be:

• a market shock (like the pandemic) that hits all industries and all geographies;
• or a local economy shock (like if you’re in Venezuela and battling hyperinflation);
• or your specific industry might be struggling from a change in technology or consumer tastes (like print journalism);
• or your specific company might be hit (like Enron, Lehman Brothers or Arthur Andersen – large companies who disappeared quickly and unexpectedly);
• or your individual department might be restructured away (say, a change in leadership comes and decides to stop offering a product handled by your department or closes the regional office where you work).

If you just pay attention to your immediate job, you may miss changes happening at the company, industry or market level that still affect you. If you only follow the general news, you can overlook changes happening right under your nose. The only comprehensive solution is to pay attention to news at all levels.

Read your company announcements. If your company is moving in a direction that isn’t tied to what you’re doing or, worse, moves away from what you’re focused on, then that’s a warning sign.

2 – Review your company policies surrounding layoffs

Even if you don’t think a layoff is imminent, it’s better to review your company policies now while you’re not panicked about finding your next job or in shock at being laid off.

You want to understand how severance is calculated, if and how accrued vacation is handled and vesting rules for retirement benefits and other deferred payments. If you rely on a bonus, what happens if you get laid off before it’s paid out? Don’t assume you will automatically be able to collect what you were expecting, but don’t assume the worst either. Read your HR policy manual, and find out firsthand.

The good thing about doing this when layoffs aren’t in the air is that you can ping a friend in HR with any questions you have and not arouse suspicion. Just tell them you’re spring cleaning your files, came across this policy book and what does page 3 on accrued vacation mean in layperson, non-HR language?

Knowing your company employment policies can mean hundreds, sometimes thousands of additional dollars in your pocket – and FIRE fund. I once worked for a company that gave paid time off on an accrual basis – e.g., every two weeks you would accrue ~1 vacation day, such that by year-end, you would have ~4 weeks of paid vacation. This company also paid out for unused vacation. If your end date was set on the cusp of a two-week period, and you negotiated to get it pushed out just another day, you would accrue one more day of vacation. That’s one extra day of pay, just for working one extra day – you doubled your salary (at least for one day)! Read the fine print!

3 – Prepare a job search strategy even if you’d prefer to stay

Just knowing your company policies will put you on more solid footing if the worst happens. But you can also proactively soften your landing by building a job search foundation now, even if you never actually look for a job.

Update your resume. Clean up your LinkedIn profile – LinkedIn has made available several new features specific to job seekers. Reconnect with former colleagues and classmates from your alma mater. Quietly look around the company and its subsidiaries or other offices (if it’s large enough) for places you want to transfer, if it’s just your department that is closed.

4 – Consider accepting the early (and usually higher) buyout offers

If layoffs are announced in your company, or even if just a restructuring is planned, the company may float a buyout offer, where they ask employees to volunteer to get laid off. You might not be anywhere near the layoff target list, so don’t just assume that you’re losing your job. If you love your job, take steps to secure your job, even in uncertain times.

That said, a small number of layoffs now may be a sign of more layoffs to come. As the company keeps shedding staff, the severance offers tend to get smaller or at least more boilerplate, making it hard to negotiate something extra for yourself. I once worked for a media company that had large layoffs for multiple years in a row before finally getting sold (and then later disappearing altogether as it was subsumed under the acquiring brand). As soon as I heard of the first round of layoffs, I lobbied for a package. It took almost 18 months to finally get a package, but it was still early enough that I was able to negotiate an end date that took me up to my retirement vesting period (which put over $25,000 into my FIRE fund). Not two years after I left, the company cut severance payments by half.

5 – Land a new job quickly – and bank the severance

If you put together your job search material and start your networking early, you can start your job search as soon as your layoff is announced. You get the jump on your other laid off colleagues who still have to catch up on their material and networking. Therefore, you apply to jobs earlier, before everyone else floods the market. You might even land something before your severance payments end, and you get paid twice!

I had a friend who landed a job while she was still collecting severance from another job. Then her new company was acquired in a hostile takeover, which triggered a guaranteed severance payment to staff, including my friend even though she was brand new.

She ended up getting that severance on top of her first severance – two paychecks while not working!

6 – Turn your employer into your first consulting client

If you are laid off due to a restructuring or some other reason than poor performance, your employer may still have work for you as a consultant. Your former company may have need to trim in-house staff, saving money on benefits and having more flexibility to reduce resources according to business conditions. But if there is still work that you can do, your company might love to have you come in as a consultant.

Your company wins because it doesn’t have to train you. You win because you keep money coming in, while you job search. You may even find that consulting is preferable to an in-house job, and your former employer can help you start a business.

7 – Supercharge your FIRE journey with your new side gig

Even if you don’t like consulting and ultimately opt for an in-house job, consulting to your former employer (or other client) can be a side gig that supercharges your FIRE journey. If you build a consulting business around something you enjoy doing, work can feel like play (this is another of the four strategies we highlight to achieve FIRE). Or the consulting income can be earmarked to accelerate savings or to buy income-producing assets, like real estate.

Your layoff can be turned from a liability to an opportunity

With some planning and preparation, a layoff can lead to a side gig. The severance can mean an influx of money that can be added to your FIRE fund. Even the specter of an imminent layoff can prompt you to take a more proactive approach to your career management – leading to better productivity, better results and, as a result, potentially better pay.

And just like that, a layoff goes from a liability to an opportunity for your FIRE journey.