It dawned on me a severance package can be valued like a risk asset (stocks, bonds, real estate etc). The value of a severance package can go up or down based on its projected income, your need for a financial buffer, and your ability to negotiate properly.
For those of you who are strategically looking to leave your job, enhanced federal unemployment benefits have also increased the value of a severance package. After all, unemployment benefits are a key income stream that come with a severance package.
Even though enhanced unemployment benefits are no longer, they will likely come back again when things turn sour. The economy is slowing down due to elevated inflation and the Fed hiking rates. Layoffs will be coming again. The wise person plans ahead by trying to negotiate a severance before getting laid off.
Never Quit Your Job Please
Most people should never voluntarily quit their job. Instead, always try to negotiate a severance package instead. If you plan to quit your job anyway, there is no harm in trying to negotiate a severance package. The key is to negotiate strategically and with respect.
A severance package not only includes a severance check or multiple checks. It can also include getting your deferred stock and cash compensation paid, if any. For those who work in finance or technology, negotiating a severance package is particularly valuable.
Further, if you get laid off at a larger firm, you are also typically eligible for 1-3 months of legally-required WARN Act pay. Many people still confuse getting a severance with WARN Act pay. A severance is discretionary, WARN Act pay is not. Don’t let your employer fool you.
Finally, if you negotiate a severance, you are most certainly eligible for receiving state-provided unemployment benefits for usually up to 27 weeks. During extenuating circumstances, like during the Global Financial Crisis or a pandemic, the federal government sometimes steps in and provides more.
If you quit your job, however, you are ineligible for unemployment benefits most of the time. The reasoning is simple. If you quit your job, it means you don’t need the money. Otherwise, you wouldn’t have quit! Besides, your old employer has to confirm/sign-off with the unemployment department if you apply for unemployment benefits.
The only thing you can do is to “quiet quit” by doing the minimum your job expects of you. If you’re burned out, working up to 100% for 100% pay makes sense. Forget about working overtime for nothing. Set work and life boundaries. However, also be flexible to adapt if you notice signs of work trouble.
Enhanced Unemployment Benefits Increase The Value Of A Severance Package
Due to the global pandemic, the federal government has passed multiple stimulus packages to help laid off Americans survive.
On March 27, 2020, the government passed the CARES Act which provided an extra $600/week of enhanced unemployment benefits, initially through July 31, 2020. Therefore, the value of a severance package has gone up.
Take a look at a chart I put together highlighting the states with the highest unemployment benefits plus the enhanced unemployment benefits. Receiving $4,276 – $5,692 a month in unemployment benefits per person was a huge lifeline for so many.
If you so happened to have quit your job in 2020, you would have received zero unemployment benefits! In 2020, the average value of a severance package was likely the highest in American history. At the same time, for several months at least, the desire to leave a job may have been the lowest due to so much uncertainty.
For most states, you can receive 26 weeks of state-paid regular unemployment benefits. Therefore, if you were unemployed in Massachusetts for 26 weeks, you would have received at least $21,398 in unemployment benefits.
But for about 16 weeks, you would have received an additional $9,600 in unemployment benefits for a total of over $30,000. Hefty!
Continued Enhanced Unemployment Benefits
In 2021, a new $1.9 trillion stimulus bill includes $300 in enhanced unemployment benefits through September 6, 2021. Further, the initial $10,200 of unemployment benefits will be tax-free for households that make under $150,000. I’ve updated the chart above with the new information below.
If you quit your job, you won’t be eligible for between $3,076 – $4,492 a month in enhanced unemployment benefits through September 6, 2021 from these top states. Although it’s not as much as what was offered in 2020, the economy is in much better shape today.
The employment picture will continue to improve through the second half of 2021 as more people get vaccinated. Therefore, more Americans will have more employment options. This also means the desire to leave a job and negotiate a severance should increase.
Rationally, if you can afford to, it is more logical to take your time and find the best job possible until your unemployment benefits run out. The last thing you want to do is jump back into the fire and get overcooked due to a bad fit.
There Is No Shame In Collecting Unemployment Benefits
Some people still feel ashamed about collecting unemployment benefits. If you are one of them, don’t be. Employers pay an annual Unemployment Insurance (UI) tax. Which means employees ultimately pay for at least some of the unemployment benefits through lower wages. Nothing is free, folks!
The UI program is part of a national program administered by the US Department of Labor under the Social Security Act.
New employers pay 3.4 percent for a period of two to three years on the first $7,000 in wages paid to each employee in a calendar year. The UI rate schedule and amount of taxable wages are determined annually. The Employment Development Department notifies employers of their new rate each December.
The maximum tax is $434 per employee per year (calculated at the highest UI tax rate of 6.2 percent x $7,000.) The more employees an employer lays off, generally the higher its UI tax rate goes.
Not collecting unemployment benefits when you are unemployed is like not collecting Social Security when you are at the government-determined retirement age. That would be just silly after a lifetime of paying into the system.
Therefore, people who quit their jobs without a new job lined up are doubly silly! Further, I argue that quitting a job with only a two-week notice is selfish. It’s more magnanimous to engineer your layoff in order to properly find a replacement.
You Can Collect Unemployment While You Have A Severance
Just like how you can collect unemployment while you earn investment income, in America, you can most likely collect unemployment while you are still earning severance income.
First of all, it takes time to start receiving unemployment benefits. You need to apply soon after you get laid off. Then it takes at minimum two weeks for the state to process your application and check with your old employer that you’ve indeed been laid off.
While you wait for unemployment benefits to begin, your severance check may come before or around the time you start receiving unemployment benefits. Even if your severance check is delayed and your severance package includes months or years of deferred compensation payments, you should still be able to collect unemployment benefits.
Unemployment benefits and a severance package are separate benefits. Unemployment benefits are dictated by whether you are employed or not. If you are laid off without cause, it is your legal right to receive unemployment benefits.
A severance package is voluntary monetary compensation an employer pays an employee who is laid off. It is in addition to unemployment benefits.
The Value Of A Severance Package Went Up
The value of an asset is based on its income stream. For example, the value of a rental property goes up when its rent increases. When interest rates go down, the value of a rental property or any cash-flowing asset goes up too. It now takes more capital to produce the same amount of rental income as it did a year ago.
In a similar vein, it’s often easier to make more passive income in a bear market. When the Fed is hiking interest rates, the yields on risk assets tend to go up to stay competitive.
The same type of analogy can be said with the value of a severance package. The value of a severance package has increased because one key component of the package, unemployment benefits, has gone up. The increase is temporary, but it is an increase all the same.
Further, the value of a severance package has also gone up because interest rates have come down. Let’s use interest rates as a temporary way to capitalize the value of your severance package income.
For example, at a 3% 10-year bond yield, it used to require $1,796,800 in capital to generate the equivalent of the annualized $53,904 a year in maximum unemployment benefits for a Massachusetts resident. At a 1.5% 10-year bond yield, you now need $3,593,600 in capital to generate the same amount of unemployment income.
How Much Has The Value Of A Severance Package Gone Up?
For the top states in my chart, enhanced unemployment benefits lift overall unemployment benefits by 36% – 54%. For the states with the lowest unemployment benefits, the enhanced unemployment benefits lifts overall unemployment benefits by 54% – 127%.
Let’s take California for example. The standard unemployment benefit amount is $450 a week or $1,800 after four weeks. An additional $300 a week in enhanced unemployment benefits would mean a 67% increase.
Now let’s look at Mississippi. The governor got rid of the mask mandate. He fully opened up the economy two months before there was enough vaccine supply for all adults. Mississippi’s weekly unemployment benefit amount is $235. Therefore, an additional $300 a week in unemployment benefits equals a 128% increase.
Let’s estimate unemployment benefits for 27 weeks accounts for 20% of the value of a severance package. We can, therefore, calculate the average value of a severance package has gone up by 7% – 25% ((36% – 127%) X 20%).
Once you take into consideration the drop in interest rates, the overall average value of a severance package may be up another 50% – 100%, temporarily. In calculating the value of a severance, the interest rate is actually the greater determinant.
Example Severance Package Value Calculation
The value of a severance package is a function of unemployment benefits, interest rates, return rates, and how much severance you get per year worked. But here are some basic calculations no matter what economic environment you find yourself in.
1) Normal Unemployment Benefits / 3% Interest Rate
- 10 weeks of pay = $20,000
- WARN Act pay for 8 weeks = $16,000
- Unemployment benefits for 20 at $450/week non-enhanced = $9,000 (20% of total)
Total value of severance package = $45,000 or $3,750 a month for 12 months
Capital needed to generate $45,000 at a 3% interest rate: $1,500,000
2) Enhanced Unemployment Benefits / 1.5% Interest Rate
- 10 weeks of pay = $20,000
- WARN Act pay for 8 weeks = $16,000
- Unemployment benefits for 20 at $750/week enhanced = $15,000 (29.5% of total)
Total value of severance package = $51,000 or $4,250 a month for 12 months
Capital needed to generate $51,000 at a 1.5% interest rate: $3,400,000
Capital needed to generate $51,000 at a 3% interest rate: $1,700,000
The interest rate is the biggest determinant in valuing the severance package. However, enhanced unemployment benefits temporarily boosts the capitalized value of a severance by $200,000 ($1,700,000 – $1,500,000) if we keep the interest rate the same at 3%.
Given unemployment benefits and deferred compensation aren’t forever, we can’t use the capitalized values to permanently value a severance package. It’s just one way of looking at it. The true value is the total combined income of the severance package.
Even after enhanced unemployment benefits expire, the value of a severance is still much higher today due to more government programs under the Biden administration.
Bottom line: Never quit your job or get fired! Always try to get laid off with a severance package instead. You have nothing to lose. A severance package not only provides you money, but also buys you time to do your next thing. The value of a severance package has gone up. You would be foolish not to try and negotiate for one.
How To Engineer Your Layoff – New Edition
With the desire to traditionally publish a book on my mind, my wife and I decided to first spend time updating our severance book, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye.
The book has grown from initially 120-pages in 2012 to now over 200-pages. I’ve consistently incorporated reader feedback and case studies. The latest edition covers when to hire a lawyer and answers to new intriguing reader questions. I’ve also updated the resources and more.
If you’ve been grinding away at a job you don’t particularly enjoy, get ready for an explosion of new work opportunities. During lockdowns, I think we’ve all realized life is too precious to continue doing something that doesn’t provide us joy or meaning.
If you want to buy the book, use the code “saveten” at checkout to save $10. Negotiating a severance is what gave me the courage to leave a well-paying finance job to do something I love. Not a day goes by where I’m not thankful for taking a leap of faith in 2012.
The Value Of A Severance Package is a Financial Samurai original post. For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. I help people get rich and live the lifestyles they want.