Planning ahead: how to secure your financial future after retrenchment with smart choices

20 Nov 2024

Getting retrenched is very stressful, from the emotional and financial stress, to making many important financial decisions quickly.

Question

I have just been retrenched and I’m feeling quite overwhelmed by all the decisions that I need to make. Do you have any suggestions about what the big pitfalls are and how to avoid them?

Answer

Getting retrenched is incredibly stressful. Not only do you have to cope with the emotional and financial stress that comes with retrenchment, you also have to make many important financial decisions quite quickly.

I will run through a few of the key issues that you need to be managing.

Cashflow

Since you will no longer be receiving a salary, you need to ensure that you have sufficient funds to tide you over the period that it is going to take for you to find another job or get your own business up and running.

The first step here is to establish how much you spend in a typical month. I would recommend that you go through your bank and credit card statements and list all the items that you spend money on.

Now, because this is an emergency, I would recommend that you identify those items that you can cut out of your budget until such time as your income stream is steady. This will give you a good idea of how much you need each month.

Take this amount and multiply it by the number of months you think it will take you to start earning again. This will give you a good idea of whether your severance package will be sufficient to tide you over this period.

Sources of income

There are a few income sources open to you:

UIF: Remember to register for unemployment insurance. This can take a while to kick in, so register as soon as you can.

Retrenchment cover: If you have any debt, take a look at the credit agreements to see if there is any retrenchment cover. You may be pleasantly surprised. I was able to help several people with this when we had the big wave of Covid retrenchments.

Side gigs: While you are looking for work, start looking for opportunities to earn additional income.

Severance package: You will be paid out a severance package. It is important that you keep this money in a separate account from that which you use for your day-to-day living. If you don’t, you could run the risk of overspending.

Medical aid

If you are part of an employer medical scheme, you should consider continuing your membership in a private capacity. If affordability is an issue, then consider downgrading to a lower-level benefit option.

Read more: Choosing a medical scheme on a tight budget

My concern is that if you are not a member of a medical scheme for an extended period, the scheme may apply waiting periods to your cover when you rejoin.

Group life cover

Many companies offer some form of group life insurance. One of the benefits here is that, should you die, your family will typically remain on the same financial trajectory even if you died before you retired.

When you get retrenched, however, this group life cover will fall away and your family may be financially vulnerable should you die before being re-employed by a company with a group life scheme.

You may be able to exercise a conversion option where you can continue with the group life cover without having to be medically underwritten. You would have to pay the premiums yourself.

I would recommend that you consider doing this to ensure that you are covered until you are re-employed. You can then cancel the insurance if it is no longer needed. You often only have 30 days to exercise this option, so do not take too long to make a decision.

Pension fund

I would recommend that you move your retirement funds into a preservation fund. This will preserve your retirement benefits and ensure that you do not pay any unnecessary taxes.

Read more: How pensioners can grow wealth and pay less tax

If you do find that your severance package has been depleted before you can find a job, you will be able to make a withdrawal from the preservation fund. Do not plan on accessing these funds unless you genuinely run out of money. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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