Navigating Financial Challenges Post-Retrenchment

Against the backdrop of a challenging economic climate, the third quarter of 2023 witnessed a surge in retrenchments, leaving individuals grappling with financial uncertainties. Hopefully, the information below serves as a guide for those impacted to navigate through their current financial situation.

First and foremost, before the possibility of a layoff or retrenchment arises, you should always set aside some cash savings as emergency funds. This fund serves as a financial cushion to cover expenses during periods of retrenchment. It is recommended that individuals set aside approximately six to 12 months of their expenses, as this duration is generally considered sufficient for most people to secure their next job position.

If retrenchment occurs before emergency funds are established, your immediate focus should shift towards prioritising your cash flow management. Effective cash flow management is key, in the event of retrenchment, as it will determine whether you have sufficient financial resources to sustain you until the next job opportunity arises.

To begin this process, you would need clarity on how much you are currently spending as a family.

It will be helpful to itemise all your expenses and list the corresponding amounts for each item. Next, you would want to categorise the expenses into essential expenses and discretionary expenses.

Essential expenses are things that you need to spend on, e.g., mortgage, utilities, and groceries.

Discretionary expenses cover optional spending that you can reduce in the event of retrenchment, e.g., entertainment, dining out, and buying the latest gadgets. By identifying which discretionary expenses you can reduce and setting a budget for these expenses, you would ensure that you have sufficient funds during the retrenchment period.

This might also be a good time to clean up existing subscriptions that you are no longer using.

After this exercise, you should have a good idea of how much you are spending every month.

The next part involves figuring out where you can fund your expenses.

In Singapore, many married couples have dual incomes, and it will be helpful to discuss with your spouse to see if the family’s expenses can be taken care of by just his or her income alone. If relying solely on your spouse’s income is not a viable option, you would next want to identify and strategise the available resources you have to tide you through this period.

The most immediate resource available to you would be the retrenchment package provided by your employers in the event of retrenchment. Usually, if you have been employed for more than two years with that employer, you should receive between two weeks to one month of salary for each year of your employment. Should the retrenchment package prove insufficient to cover your expenses, the subsequent step is to evaluate the available assets that can be accessed to bridge the gap.

Out of your existing assets, it is advisable to first use cash-equivalent assets such as cash savings and fixed deposits. The rationale behind this is that investment assets are typically purposed to help you achieve certain goals (such as saving for your children’s university funds and saving for your retirement funds). If you were to liquidate your investments, especially if they are down due to market conditions, that means that you will be actualising any losses and hence miss out on future returns when the markets recover. This might then set you back from the goals you have originally set up the investment for. While considering this, you might still want to pause your monthly investment plan as cash flow is the priority during the period of retrenchment. You can always resume and make up for missed contributions once you return to full employment.

To further ease your cash flow, consider reassessing your insurance needs and reviewing your existing insurance policies. Over the years, some of us may have bought insurance policies that may no longer be applicable or beneficial to our situations. You can opt to discontinue these policies to free up your cash flow and potentially receive some cash value from them. However, you should work with a trusted adviser to carefully evaluate your insurance needs and decide which policies to terminate. This is because it might be more costly or harder to buy similar insurance coverage in the future if you discover that you still need the insurance that you have just terminated.

Lastly, it is crucial that you do not rely on debts to pay for your expenses.

Using credit cards, for instance, can result in high interest charges, potentially reaching 28% p.a. if you fail to pay off your credit card balance on time. The daily compounding nature of credit card interest can lead to your debt snowballing into a large amount very quickly.

For those who are servicing a home loan, you can choose to service the loan using more of your CPF OA funds so that you can free up your cash for other expenses. If difficulties arise in repaying loans from personal resources, consider engaging with banks or HDB (depending on your type of home loan) to explore potential solutions. A possible idea could be to extend your loan duration so that your monthly installment is lower and hence more manageable.

In conclusion, navigating through retrenchment requires a strategic and proactive approach to financial management. By planning for emergency funds in advance, having clarity on your expenses, and deploying your available resources prudently, individuals can have greater assurance of navigating through this challenging period.

This is an original article written by Alvin Neo, Client Adviser at Providend, the first fee-only wealth advisory firm in Southeast Asia and a leading wealth advisory firm in Asia.

For more related resources, check out:
1. This Time Is Different but This Too Shall Pass
2. Our Non-linear Life Affects How We Plan for Our Wealth
3. What a Holiday Trip Taught Me About Investing

*Providend is very excited to share that we are now ready to extend our service offerings to the younger accumulators who are looking for holistic, independent, conflict-free wealth advice!

For this group of younger accumulators, we know that it is not easy to make retirement planning a priority when other financial goals – buying a first home, for example, or saving for a child’s education – appear more pressing. Learn how we can help here.

We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.

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