One of the most challenging things anyone has to deal with in their financial life is an unexpected loss of a job. Besides being mentally crushing, losing your primary income can be a devastating financial blow, especially if you didn’t see this coming and had no way to prepare.
This is exactly the case with one Redditor posting in r/personalfinance, who was unexpectedly laid off from a tech role at 55. This is a pretty brutal introduction to Reddit as a new poster, but it also speaks to this individual’s desire to move quickly and get their finances in order.
The Current Financial Situation
As a tech worker, this individual is based in San Francisco and was unexpectedly laid off from a role after spending 13 years working their way up the ladder. Unfortunately, given the current job climate, there is an immediate concern that they won’t be hired in the tech field ever again, so there’s a potential worst-case scenario here.
On the plus side, there is a strong financial situation already in place, composed of $950,000 in 401(k) accounts, as well as $1.25 million in a brokerage account that’s split chiefly between various ETFs. There is also approximately $450,000 in cash, which will be used as an emergency fund for living expenses and any necessary home maintenance.
As far as a home, there is a $640,000 balance on the home mortgage, but with a 2.5% interest rate, this isn’t something that should be on the Redditor’s immediate radar, at least as far as paying it off. The home itself is worth around $1.6 million, so there is a good chunk of equity.
When it comes to home expenses, the Redditor is currently spending around $70,000 annually, which is inclusive of mortgage, property taxes, insurance, utilities, food, etc. Of course, the Redditor claims this is frugal living. The good news is that they believe they can reduce some of their costs by selling their house and buying a condo for around $900,000 in cash, which will mostly come from equity.
On the plus side, there is also $330,000 in previous tax losses that can be pushed forward, but the big question is what to do with $400,000 in cash. With the real fear of not being able to land another cushy cash gig, the Redditor has to focus on what they have right now and determine whether or not they can manage.
There Isn’t An Immediate Need for Fear
Aside from taking a bit of a mental break to recover from the loss of a job, the Redditor should remember that they aren’t in danger of losing their home or lifestyle, so this is the good news, and it should serve as a reminder that they are in a much better position than other people who have lost their jobs as of late.
If this individual were someone I was close to, I might recommend that they just stay retired. This is doubly true when you consider that they have a freelance role they’ve worked on for two plus decades that pulls in around $30,000 annually. Now, add that to a 4% withdrawal from their $2.5 million portfolio, and you have roughly $130,000 available annually for spending. Even accounting for taxes, there is still more than enough to cover the roughly $70,000 in annual expenses, which is likely to decrease if the Redditor follows through with their intention to sell their home and buy a condo with the equity from the sale.
The Redditor tries to point out that if they were anywhere other than San Francisco, retirement might be more likely. They are admittedly also scared of a stock market crash, a real estate crash, and not finding a job again, but all of these mental concerns are pretty typical for someone who has recently had a major life-changing event take place.
How to Handle the $400,000 in Cash
When you start to consider how the Redditor needs to handle the $400,000 in cash, the answer isn’t all that challenging. Conventional wisdom suggests maintaining at least 6-12 months of emergency funds, which amounts to around $150,000. With the other $250,000, the Redditor can set aside whatever they need to cover the cost of a new roof on a home, which is likely around $50,000.
This leaves around $200,000 left, so there is every reason not to just let this money sit around in cash. Instead, the Redditor should look to invest this money in a low-cost index fund that can deliver strong returns while the money isn’t needed. Alternatively, the Redditor couldn’t put the money into something like SPY or VOO and just allow the diversification of these ETFs to accrue over time.
There is no question in my opinion that this additional $200,000 should be invested and growing, especially when I look at how much money the Redditor needs right now while they are deciding what to do about looking for a new role.
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