Opinion: This pre-retiree just quit his job – is it worth paying off the mortgage with the severance package?

Dear Sam:

I love “yes or no” questions, but this is not one of them. After 30 years as a finance professional, I’ve learned that personal finance decisions involve a complex set of variables.

Severance pay can provide peace of mind with proper planning, but so depends on the individual. Do you have another job lined up? Do you intend to work? Full retirement? Or start a business? Do you have any upcoming family expenses, such as school fees?

Additionally, you need to understand the payment you receive from your employer and how best to use the funds. In addition to your regular salary, you may be eligible for paid time off (PTO) and severance pay.

According to Heather Rider Hammond of Gravel & Shea PC in Burlington, Vermont, “Severance pay is compensation paid to the employee on a post-employment basis. It is not payment for services rendered, so it is not considered qualified compensation.”

Therefore, it is important to establish the amounts and timing of these final checks and do some cash planning.

There are five areas to pay attention to before making your final decision:

Assess cash flow needs: Depending on what you do, your future cash needs vary. For example, with starting a business, there are always start-up costs. Set aside enough for these costs, as well as some money to live on while you start the business. If you’re looking for another job, you also want cash until your next paycheck arrives.

If you retire, save money to live on until 2023. Starting retirement withdrawals in the new tax year will save you income tax. More importantly, the time frame will give you a realistic idea of ​​your monthly cash needs after work to set a monthly retirement fund payout.

Lily: Can I afford to retire? Not until we know the answer to this big question

Establish important cash accounts: A security account is mandatory for good financial planning for everyone, even if you are retired.

Also, set aside money for potentially big expenses: your next car, big jobs around the house, medical bills. This one-time lump sum is a rare opportunity to establish your future stability.

Check with Human Resources: Discuss your options with them and make the following changes.

— Increase the pension contribution to reach the maximum before termination: At your age, you can contribute $27,000 this year. (The maximum before age 50 is $20,500.) However, this increase cannot be made with your severance pay, only your qualified earned paycheck. According to Hammond, “It is possible for a departing employee to defer her ‘last paycheck’ (including her PTO payment) to her 401(k), but not severance.”

– Adjust your health savings account: if you have one at work, max it out, like your 401(k) before terminating your job through payroll deduction for the pre-tax benefit . For you, that means $4,650 (with a $1,000 catch-up) and $8,300 for a family (with a $1,000 catch-up). Again, this cannot be done with your severance package, so plan your final contributions accordingly.

— Learn about the following options:

Can you receive your payment in installments? Getting your payment over two years can save you income tax. This is at the employer’s discretion in the event of a layoff, but generally not in the event of a sale or company merger.

Contribute sick leave or vacation to a work bank? This voluntary system is offered in a small number of companies. You would be giving up income but reducing your income (and your taxes) while doing good for someone else.

Paying on loans, insurance or other 401(k) benefits offered only by work? More deductions mean less expenses in the future and some may still qualify as pre-tax contributions.

Talk to your accountant (or consult one): They’ll know if this allowance will push you into another tax bracket and how best to adjust your W-4 now so you don’t have any surprises next spring. Also, they will be able to tell you if you are eligible for Individual Retirement Account (IRA) funding. Funding a Roth or Traditional IRA for 2022 and 2023 allows your money to grow tax-free. If you have the option of opting for a traditional IRA, then it will be tax deductible. Since you are over 50, you can set aside $7,000. (The limit is $6,000 for those under 50.)

Other Considerations: Check with your state department of labor to determine if you qualify for unemployment. Each state has different rules.

If you receive severance pay in installments over 2022 and 2023, it may give you more options to put money aside for retirement and save on income tax. It will also potentially delay your ability to collect unemployment.

After gathering the above information, you can decide what is left and allocate it to your mortgage. Remember that you will still pay home insurance and property taxes every year.

Being laid off stirs up emotions and none of us make the best decisions under stress. (Hans Seyles proved the physiological impact of stress on decision-making in the 1930s.) If you choose to delay a decision on a mortgage payment until a few months into your new life, that’s understandable and wise.

Also on an emotional level, paying off a mortgage always feels good no matter where you are in life or in the world. It’s a good financial strategy. (Here I see Colonel Potter on “M*A*S*H” burning his mortgage papers in Korea.)

Never reduce your life or your important decisions to simple black and white. All good decisions come from those who wait and have all the information.

CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal finance speaker. She blogs at MoneyPeace.