Written By : Kim Borwick
Edited By : Emily Miller
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This page features 7 Cited Research Articles

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If you’ve recently become unemployed, you are probably experiencing immense stress and anxiety. This is natural, and you have the right to take a little time to process the loss and develop an active, positive coping strategy.

A study published in the August 2018 issue of the International Journal of Environmental Research and Public Health explored indicators of anxiety and depression in a sample of 244 unemployed people in the Andalusian city of Huelva. Only 5.7 percent of the participants had no depressive symptoms and 41.3 percent had no signs of anxiety.

“The results showed that people with problem-focused coping strategies have lower levels of stress, anxiety and depression,” the authors stated, citing a separate study on coping with the stress of unemployment.

So, now is the time to create a new financial plan. A proactive approach to solving your financial problems can prevent you from falling into the negative feedback loop of self-blame and hopelessness in your own mind.

First, you’ll figure out how much money you have available to you and how you can access it. Your liquid assets, including money in savings and checking accounts, can be used immediately to cover your expenses.

But if you need to convert a less liquid asset, such as an annuity contract or certain investments, into cash, you must determine how much money you need and the next physical action you’ll have to take to get it.

For example, covering your living expenses during unemployment is a valid reason to sell your annuity payments. You can get cash for your annuity relatively quickly, but it’s a process, and the sooner you initiate the sale, the sooner you’ll have the cash to pay your debts.

Take Inventory of Your Assets and Debts

In the same way you budget your salary or wages, you will calculate your income from other sources and allocate it appropriately. Your employer may have offered you a severance package when you were laid off, or you may be receiving unemployment benefits. Perhaps you have the recommended three to six months’ salary in a savings account for emergencies or you’re close enough to retirement to start drawing Social Security.

Possible sources of funding while you’re out of work include:
  • Severance package
  • Unemployment insurance benefits
  • Annuities or other assets with cash value
  • Emergency savings
  • Social Security
  • Investments
  • Retirement accounts
  • Life insurance policies
  • Home equity loan, reverse mortgage or home equity line of credit

Many of these options are less than ideal for your future financial well-being, as they may have tax consequences or the unwanted side effect of reducing your retirement savings. So consider each possibility carefully to create a strategy that will get you through this critical time with the least amount of long-term damage.

Review Your Budget

Bearing in mind your list of assets, income and expenses, review your budget. Prioritize your expenses, and be prepared to cut costs wherever you can.

Be prepared for the cost of certain necessities, such as health insurance, to increase. For example, if your former employer offers a group health plan, you may qualify for coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), but the premiums will be higher than those you paid when you were employed. You may also be eligible for a Health Insurance Marketplace plan or Medicaid.

Identify the most affordable option, and adjust your budget accordingly.

Whereas health insurance costs are likely to increase, other expenses may decrease — or at least offer you some wiggle room.

For example, you may be able to work with creditors to establish payment plans, which may ease some of your financial burden. This is another situation in which it pays to be proactive. Although doing so typically means your credit score will take a hit, contacting creditors in advance may prevent you from racking up costly late fees or insufficient-funds charges.

According to the National Foundation for Credit Counseling, if the creditor closes the account or reports the payment plan on your credit, it will have a negative impact on your credit score until you either pay off the balance or return to your original payments.

It’s important to be thorough when reviewing and adjusting your budget. Anticipate significant changes and be realistic and versatile in responding to them.

Decide What to Do with Retirement Accounts

If you’ve been laid off from a company that offered an employer-sponsored retirement plan, your 401(k) could have a sizeable balance. You need to decide what you want to do with the money now.

Options for 401(k) plans:
  • Maintain your existing plan
  • Cash out
  • Roll the funds into another qualified account

Keep Your Existing Plan

If you choose to stay with your former employer’s plan, you won’t be permitted to contribute to the plan, but your money will continue to grow tax-deferred.

According to the National Association of Retirement Plan Participants, this should be considered only as a temporary solution because it’s difficult to manage or get information about a retirement account when the participant is no longer employed by plan sponsor, i.e., the company.

Cash Out

Cashing out your 401(k) in a lump-sum is the least advisable option. It may seem like a viable way to get the cash you need to tide you over until you find a new job, but taking this money now will significantly impact your retirement.

Not only will you have to pay income taxes on the full amount, but you’ll also have to pay an early withdrawal penalty of 10 percent if you’re younger than 59 ½ years old.

In addition, you will sacrifice the compound growth of the funds, which could conceivably cost you hundreds of thousands of dollars over the course of your working life.


Your best course of action is to either transfer the money to your new employer’s plan — if one exists — or roll it into an IRA or other qualified account.

The Internal Revenue Service allows plan participants to roll over their funds in one of three ways.
Direct rollover
You can have your plan administrator send a payment directly to another retirement plan or IRA. No taxes are withheld from a direct rollover.
Trustee-to-trustee transfer
Distributions from IRAs can be made directly to a new IRA or retirement plan. No taxes are withheld from a trustee-to-trustee transfer.
60-day rollover
If the distribution from your retirement plan or IRA is paid to you directly, you have 60 days to deposit the funds into another qualified plan. If you fail to deposit the funds within 60 days, the IRS will tax the full amount of the distribution and levy the 10 percent early withdrawal penalty. Even if you deposit the funds into a new IRA or 401(k), the IRS will withhold a mandatory 20 percent from your distribution.

Note that if your plan administrator sends you a check made out to the new qualified plan, no taxes will be withheld. The tax liability comes into play when you, the participant, have access to the money.

Although the 60-day rollover is generally not advised, you may want to consider it if you have no other means of paying your bills while you’re unemployed. Just make sure you understand the consequences and do not, under any circumstances, miss the 60-day deadline to deposit the funds. Otherwise, you’ll end up owing a large tax bill and an early withdrawal penalty.

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Cashing Out Your Annuity After Becoming Unemployed

Once you’ve reviewed your budget and determined which sources of income will effectively get you through this period of unemployment without completely obliterating your retirement savings, you’re ready to make an informed decision about cashing out your annuity.

How Much Money Will I Get from My Annuity?

Consider whether cashing out your annuity is worth it. Keep in mind that you won’t receive the full cash value of the contract, and you will have to pay taxes on the money you receive.

When you sell your annuity or structured settlement payments, the company that buys them will charge a discount rate of approximately 9 to 18 percent.

If whatever you’re left with after taxes isn’t enough to make a dent in your living expenses, you might want to consider other options.

On the other hand, if you need less cash than the full value of your annuity contract, you can do a partial or lump-sum sale. In both cases, you sell only a portion of your annuity cash value — either a number of payments or a specific dollar amount — and retain the rights to your future payments.

For example, you can sell $20,000 of your $50,000 annuity to cover expenses while you’re unemployed, and the remaining funds will continue to grow tax-deferred and be distributed to you on a regular payment schedule.

Selling your annuity payments can relieve some of your stress and give you time to find a job that may very well be better than the job you just lost. The decision to sell depends on your existing resources and current needs.

If you can’t find a job and you need money fast, you’ll be tempted to make decisions that may hurt you financially down the road. Resist the urge to simply take whatever cash you can get.

Be thoughtful and intentional about how you handle your money, and use your creativity and resilience to forge a new path for yourself and your family.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 26, 2021

7 Cited Research Articles

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  1. Hartman, R. (2020, April 8). What to Do With Your 401(k) if You Get Laid Off. Retrieved from https://money.usnews.com/money/retirement/401ks/articles/what-to-do-with-your-401-k-if-you-get-laid-off
  2. Internal Revenue Service. (2020, February 6). Rollovers of Retirement Plan and IRA Distributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  3. McClary, B. (2020, June 15). Ask an Expert: Should I cancel my credit card partial payment plans? Will it help my credit score? Retrieved from https://www.nfcc.org/resources/blog/ask-an-expert-should-i-cancel-my-partial-payment-plans-will-it-help-my-credit-score/
  4. Navarro-Abal, Y. et al. (2018, August 20). Psychological Coping with Job Loss. Empirical Study to Contribute to the Development of Unemployed People. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6122016/
  5. The National Association of Retirement Plan Participants. (n.d.). What Happens if I Quit My Job? Retrieved from http://www.narpp.org/fiacademy/what-happens-if-i-quit-my-job#divID1
  6. U.S. Department of Labor. (2016). Job Loss - Important Information Workers Need To Know To Protect Their Health Coverage and Retirement Benefits. Retrieved from https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/job-loss.pdf
  7. U.S. Federal Trade Commission. (2013, December). Dealing with Job Loss. Retrieved from https://www.consumer.ftc.gov/articles/0402-dealing-job-loss