Making the most of retrenchment
Organisations around the world have been severely affected by the current dismal market and economic environment. As a result, many people now have to face the daunting possibility of being retrenched.
Retrenchment, whether forced or voluntary, can be one of the most unsettling experiences you’ll face in your life. Apart from the emotional issues, it raises various financial concerns you may not have had to worry about before. How to get by until you find another job, whether you should use your lump sum to pay off your debts and the best way to make your money last may be some of your main concerns. The time immediately after retrenchment demands sound financial management on your part and could be the most defining moment in determining your long-term financial well-being.
The natural response to retrenchment is generally one of shock and even anger, which will inevitably turn into feelings of uncertainty. This is normally when our ‘caveman’ instincts take over, we adopt an adapt or die attitude and our default mindset kicks into survival mode. But while in survival mode, there is little doubt that logical, sound long-term financial decisions begin to elude us.
While retrenchment is an anxious time, many people later say it was the kick-start they needed to start thinking seriously about financial independence. But where do you start?
Firstly, we need to protect ourselves from our ‘inner-caveman’. It is vital that we have a sound framework from which to make informed and logical decisions that take our future goals and immediate needs into account. You should therefore first evaluate your current position and determine what you have to work with and then plot your way forward in accordance with your needs.
Your current position is generally determined by your current liquid investments and the severance or retrenchment package paid to you. The following is basically what you can expect to receive upon retrenchment:
~ severance pay – this is usually at least one week’s remuneration for each completed and continued year of service. Note that the first R30 000 will be tax free – a once in a lifetime SARS exemption.
~ outstanding leave – this is paid out as gross income
~ notice pay – this is usually four week’s remuneration (for more than 1 years service)
~ pro rata bonus - this will depend on your employment contract
~ Unemployment Insurance Fund (UIF) - the UIF formulas are quite complex and depend on income brackets and period of service. This makes it very difficult to gauge exactly what one can expect. Needless to say, the general guideline is that you will receive around 40% of your final salary for about nine months.
~ pension/provident fund - you can choose to transfer your retirement savings to a new employer fund at a later date or to a preservation fund. You could also choose to withdraw the benefit and take the cash.
With the exception of your pension/provident fund, all of the above should be used to repay debt and assist you in paying your monthly expenses. When deciding on what to do with your pension/provident fund, you should be extremely mindful of the consequences of your decision. If you, like many people, are tempted to take the cash, you should remember that the amount will be severely eroded by taxation and the long-term consequences could be devastating.
For example, a 40 year old that has been contributing 10% of his/her pensionable salary for the last 10 years and is planning to retire at 60 will need to contribute at least three times more immediately after retrenchment just to recoup the loss of compounding interest. The longer you have been contributing and the closer you are to retirement, the more the factors work against you. This becomes an especially important consideration for those planning on cashing out to pay off their bonds.
Once you have a firm grasp on what your current financial situation is, you can turn your attention to how these fit your needs. Your needs should be realistic and carefully considered as you should strive to bring your monthly expenses as far down as possible. This is achieved in two key areas:
family budget
Sit down with your family (remember, you’re in this together) and draw up a comprehensive budget. This will enable all of you to negotiate around where you can cut down on expenses. There may be areas that are non-negotiable (e.g. security, medical aid, etc) and that is acceptable. The key is to get buy-in and commitment from everyone concerned.
debt
Once you have cut down as much as possible on voluntary expenses, your focus should turn to debt repayments. Interest on debt has a crippling effect on your monthly obligations and general financial well-being. The rule of thumb is that shorter-term debt generally has a higher interest rate (e.g. credit cards) and should therefore be tackled first. As far as possible, the lump sum(s) you receive should go towards paying this off.
The most appropriate approach to managing your finances depends entirely on your personal situation. Even if you are going straight into another job, the choices you make now will affect how you live in the future. This is particularly true for the way you choose to handle your retirement savings. It is therefore always a good idea to consult a Certified Financial Planner to help you devise a strategy that meets all of your requirements and future goals.
By Shaun Latter - acsis Financial Planning Coach