Generally, when a person is laid off, there is a severance package.  Severance isn’t required by law, but generally companies pay severance to those who sign agreements stipulating that they do not hold the company liable for their loss of work.  It’s worth it on the company’s part.

Most people who know a layoff is coming want severance.  When they know severance is coming with a layoff, its almost impossible not to attempt to figure out how to get the severance AND land a new job.  Any smart person would think about that, right?  More money is better than less.

I call this “The Severance Timing Challenge”.  I think its important to know what I’ve witnessed in regard to this situation.

In the last year I’ve met zero people who have pulled this off.  I’ve met at least 50 who have thought through it and tried.

Let’s think through the costs one incurs by trying this strategy…

Cost: Insurance/COBRA

Later this year the Government’s 66% subsidy of COBRA will expire.  That means people using COBRA for insurance will have to pay the full amount.  This can be pricey.  If you’re looking ahead at trying the severance timing challenge, you may be paying full price for your insurance (without the company’s help).  That can be a major cost for individuals, and an enormous cost for families!

Cost: 401(k)

When you started your retirement fund, I’m sure a Financial Advisor showed you a chart of what putting away a few dollars a paycheck would amount to by the time you retired.

Its too easy to think about the matching part of a 401(k) being only a few dollars.  That’s all you’re missing when you’re not at work and instead trying to play the severance game, right?  WRONG.

Every paycheck you miss while playing the severance challenge you miss not only the current value of your 401(k) contribution AND company match, you also miss the compounding of that money.  An example using the compound interest calculator here:

• 3 missed pay periods
• $100 contributed each pay period = $300
• 50% match by company = $150/period
• Total not contributed = $450
• 10% interest (the dow has averaged 12% over it’s lifetime, so this is conservative)
• 20 years until retirement

Value of these missed contributions in 20 years?

$3,027.37

Cost: Personal Brand

The severance timing challenge usually become evident to the hiring manager when she asks, “when can you start.”  Trying to time your severance to coincide with a start date is going to make you look greedy.

You may say, “I’ll never tell my employer.”  That’s fine.  But people will find out and whether they thing of you as smart for succeeding in the severance timing challenge or not, isn’t your call.

Cost: Stress

The stress of trying to time severance and a start date for a new job is, for many people, difficult to handle.  Stress can lead to all types of ailments.

The Challenge

If you’ve beaten the Severance Timing Challenge, let us know what you experienced and why it worked for you.  Leave a comment.