If you sever an employment relationship and are given a severance, I often find the instinct is to live off that severance. You earned it right!?

My heart goes out to anyone going through an involuntary layoff, especially within a community where the population is high or the prospects for great alternative jobs are low. So, I give extra credit to those who have been through these recent layoffs at the mines in Saskatchewan and have decided to do what they can to earn income even if it’s not in their field of training. Way to keep it rocking for you and your family!

If you’ve been laid off, but have an option to work (even if it’s not glamorous or related to your expertise), you have a choice of living off the severance or saving it.  What could the impact of either decision be?

For example, let’s consider you were given $120,000 severance, net of taxes. Let us also assume you’re 30, will retire at age 60, earn a 6 percent rate of return, and you’re in a 33 percent tax bracket.

Here are three different scenarios:

1. Save the severance.

If you save the severance in a taxable, non-registered account you would have $391,459 in 30 years at age 60.

 2. Deposit the funds into your RRSP.

By tax sheltering the growth in a Registered Retirement Savings Plan (RRSP), the $120,000 would grow into $689,219 by age 60. Not to mention that we actually would be able to invest the full gross severance amount, not just the net! (But, to keep this example simple, we’ve stuck to the net amount. It’s still a significant impact nonetheless.)

3. Live off the severance.

If you live off the severance, you will have none of it left at the end of the year. In order to accumulate the $689,219 you could have had in a RRSP by age 60, you would need to save $755 a month.

 Get the math, your gut, and your heart in alignment.

 Is it easier to tough it out a year or the few months it takes for you to get an alternative job, or is it easier to come up with the monthly savings it would take to save $689,000 over 30 years? If saving $755 a month for 30 years is a bigger grind than taking a severance and tucking it away to get through the year, you might consider putting your severance into a RRSP. This could be massively impactful on your retirement.