Although pundits continue to argue about whether the economy has slipped into a recession (technically defined as six consecutive months of negative growth), there is no doubt that even highly compensated people are hurting. To anyone who has been unceremoniously dumped from a high-paying job in finance or real estate, it certainly feels like a recession, despite the tame 5% unemployment rate reported by the Labor Department as recently as April.

The tough thing for your clients—who are probably in their peak-earning fifties and sixties and enjoying the pride in accomplishment that comes with those fat paychecks—is that they may be particularly vulnerable. Although they may feel youthful and fit, these clients are considered mature (a nicer term than old, but no less dismissive) in the workplace. "When the economy is soft, as it is now, you're going to have an increase in layoffs among mature workers," says Deborah Russell, head of the AARP's Workforce program.

What's more, it's often more difficult for older workers to find new jobs. According to researchers Sewin Chan of New York University and Ann Huff Stevens of University of California, Davis, four years after a job loss at age 55, the employment rate for laid-off workers was 20 percentage points below that of non-laid-off workers of the same age. In fact, workers 45 and older make up 14% of the labor force, yet they account for 37% of the long-term unemployed, people who have been out of work for at least 27 weeks, according to Chan and Huff Stevens.

These midlife workers may need you to be a coach as well as a planner. It's a shock to one's self-confidence to be laid off at any age, and to be thrown into the job market in midlife is dispiriting. You may have to convince clients to stay in the workforce and run the scenarios that prove your case. In today's uncertain environment, financial advisors need to know if their client's job is in jeopardy and to brainstorm about Plans B, C and possibly D.

Double Whammy 

A layoff close to retirement can wreak havoc on a well-laid financial plan. It disrupts the ability to accrue Social Security and pension credits, which tend to accumulate fastest near retirement, while also forcing people to dip into their savings. "This is the point in life when pre-retirees tend to stockpile money," says Mary Fay, senior vice president and general manager for SunLife Financial's annuities division in Wellesley, Mass.

"The kids are out of the house, and the parents are saving a lot. So a layoff is a double whammy: Your earnings are shot, and you lose the opportunity to accumulate," she adds.

According to a 2006 SunLife survey, 22% of retirees were forced into retirement an average of eight years earlier than they had anticipated because of a job loss or health problem. That can require a financial downshift.

"The toughest thing is if you've been planning your retirement based on a certain salary level," says Joel L. Naroff, president of Holland, Pa.-based Naroff Economic Advisors and chief economist for Commerce Bank. "When you get laid off, there's a significant chance that you won't get a job at that same level again."

Mike Haubrich, president of registered investment advisory firm Financial Service Group in Racine, Ill., uses this rule of thumb to explain to older clients how long it might take to land a new job: "For every $10,000 a year a person earns, you'll need a month to find a job when unemployed." The choice often comes down to two alternatives: early retirement or a lower- paying position.

Keep Working

If asked, most advisors say that they advise their newly jobless clients against taking early retirement. "It is unlikely they will have enough saved to support the lifestyle they want in retirement," says Christine Fahlund, senior financial planner with T. Rowe Price in Baltimore. A nest egg accumulated over 30 years probably isn't ample enough to support someone for the next 30, 40—or even 50 years.

Chances are, however, that an executive or middle manager won't find a job that pays nearly as much as the previous one did. "I wouldn't call middle management a growth sector," Naroff says. "If you're losing your job as a middle manager, other companies are probably making similar moves."

In fact, researchers Chan and Huff Stevens report that half of workers 55 and older who are laid off see their wages reduced by 19%, on average, in their next job; almost a quarter of the people in this age range find jobs paying less than half of what they were earning before. Now there's a confidence-builder. "They're also more vulnerable to being laid off again since they don't have tenure at the new place of employment," says Alicia Munnell, director of the Center for Retirement Research at Boston College.

Haubrich says that financial planners should monitor job situations closely and look for telltale signs of impending downsizing. To most clients who find themselves laid off, he dispenses the same two words of advice: Keep working. "However, they may need to do some retraining," he says.

The need for health insurance also factors into the decision to work, says Jim Elder of Elderado Financial in Montrose, Colo. Medicare, the government health insurance program for the elderly, doesn't kick in until age 65, and individual policies for older people can be prohibitively expensive.

One of Elder's clients, a man in his early sixties, left his white-collar job because he hated it. "He didn't discuss this with me before leaving his job. Pretty soon he found out how expensive health insurance was," Elder says.

Elder called around to several large employers in the area to find out which ones offered health benefits for part-time work. He learned that Home Depot, a company in partnership with AARP to provide jobs to older workers, does. "This guy is making only $8 an hour, but he loves his job because he has health insurance that would have cost $1,200 a month for him and his wife," Elder says.

Harsh Realities

When older workers do manage to find jobs, they may be shocked to find that the new assignments are no match for their old ones. Haubrich tells a story of one client, a woman in her early fifties, who was vice president of business-to-business sales for a small local company in Illinois. Through conversations during their financial planning sessions, Haubrich learned that the woman's firm would soon be sold. Haubrich worried that as a highly compensated employee, she might be vulnerable to a layoff. So he connected her with a career coach who told her that her $200,000-a-year salary was about $50,000 more than the going rate for comparable positions.

"It's hard to hide in the shadows of corporate downsizing if you're earning a lot," Haubrich says. Sure enough, the client was laid off.

The client soon found a new job, but in a less-senior marketing role that paid $50,000 a year less—just what the coach had predicted. "That was the biggest challenge," Haubrich says about easing his client into this harsh reality. "It's hard for a person at that point in her career to take a pay cut like that."

Other planners find themselves the bearers of bad news when they can't make the math of early retirement add up. Elder mentions a client, a former executive at Adolph Coors Co., who was laid off after the brewing company merged with Molson. The woman, now 59, wanted to retire, but Elder explained that she didn't have enough money. Her solution: Start a pet service business that built on her lifelong love for animals.

"We talked to her about the need to make sure that her account was still growing because that's a young age to retire," Elder says. "That's when she came up with idea of this business." (It is not yet breaking even.)

Early Retirement

Despite planners' warnings, some clients do decide to call it quits after a layoff. That decision requires a special type of retirement planning, quickly switching a portfolio from accumulation mode to income distribution.

Ty Bernicke of Bernice & Associates in Eau Claire, Wisc., believes that a sudden retirement calls for two separate portfolios to take into account dueling realities: the need for immediate income and for long-term growth of assets. He invests seven years' worth of expenses in a highly liquid portfolio of money market funds, certificates of deposit and bonds of varying maturities. The remainder remains in equities. "It makes sense to adjust portfolio income to meet an immediate need as opposed to a need that is seven years down the road," he says.

The key to making this work, Bernicke says, is not asking clients how much money they think they need to live on. Most people grossly underestimate how much they spend. Instead, he tells clients how much income their portfolio can generate.

"It's their job to monitor their situation to see if it's feasible to live within those parameters," he says. Often it's not, and many laid-off clients conclude that they will need part-time work as a supplement.

Fahlund also stresses the importance of growth in a retiree portfolio. A sudden retirement is no reason to go into income overdrive, she says. "You can't live on fixed income [alone] if you're looking at a 30-year retirement time horizon, so you may not actually be making significant adjustments to your asset allocations until your final years."

Bill Arnone, national director for employee financial education with Ernst & Young in New York, puts it this way: "Your time horizon doesn't become zero the day you retire. Your time horizon doesn't go to the date of retirement, it's until the date of death. Do you have any idea how long that will be?"

One of the trickiest things for clients needing income is not to run afoul of Internal Revenue Service rules about early distribution of retirement plans. Someone who is over 55 and was terminated from a job can withdraw from employer retirement plans without incurring the 10% penalty for early withdrawals.

If those funds are rolled over into an individual retirement account, however, the age is 591/2. Then the only way to withdraw money without paying a penalty is to use a Rule 72t distribution, which requires distributions for five years or until age 591/2, whichever is greater. "I prefer to leave enough in the employer's plan to bridge the gap, so there's no penalty from the IRS," Bernicke says.

Brighter Future 

Despite the difficulties that layoffs pose for older workers, people who want to remain working for longer may face a brighter future. "The unemployment rate for those who are over 55 is lower than the average," notes John Challenger, president of Chicago-based Challenger, Gray & Christmas, an outplacement firm. "People who are over 55 and who choose to work are in demand today."

Certainly the trend is toward greater workforce participation for older Americans, a reversal of a century-long trend toward younger workers. The average retirement age, now 63, is slightly older than it was just a few years back, according to Munnell.

A recent AARP survey shows that two-thirds of respondents plan to work beyond normal retirement age. "There are clearly not enough workers to fill all the positions that are needed now and in the future," Russell says. For example, she notes that 500,000 federal employees will be hitting retirement age in the next three to five years. "At the same time, younger workers don't see a career with the federal government as terribly appealing," she adds. Teaching and nursing are two other professions that will be facing worker shortages in coming decades and are likely to welcome older employees, Russell says.

Of course, age discrimination still exists, and there's no reason to believe that it will fade away. The AARP's own surveys found that at age 47, people begin to feel a sense of discrimination in the workforce.

"Working seems to be the solution du jour to the retirement saving problem. We are always telling people that it will be so easy and obvious to do," Munnell says. "But in order to make it work, older people still need an employer to give them a job." 

Ilana Polyak is a frequent contributor to Financial Planning.