How to Invest Your Severance Package in 2026

You've negotiated your severance, filed for EI, and now you're staring at a six-figure deposit in your bank account. The question that keeps you up at night isn't whether you'll find another job—it's what you should do with this money right now. Invest it? Save it? Pay off the mortgage? This guide provides a strategic framework for investing your severance package in 2026, helping you build long-term wealth while maintaining financial security during your career transition.

The Severance Investment Mindset: Why This Money Is Different

Severance money isn't like a bonus or inheritance. It comes with a unique psychological burden: this is your financial runway until the next job. The decisions you make now will determine whether your job loss becomes a setback or an opportunity for accelerated wealth building.

The key insight: a year with reduced employment income is actually an opportunity. You can make strategic moves with your severance that would be prohibitively expensive in a normal high-income year.

Step 1: Secure Your Foundation Before Investing

Before investing a single dollar of severance, you need a rock-solid financial foundation. This isn't being overly cautious—it's being strategic.

The Emergency Fund Calculation

Your emergency fund should cover 6-12 months of essential expenses, not total lifestyle. Calculate it honestly:

The Debt Decision Matrix

Should you pay off debt or invest your severance? Here's the framework:

Step 2: Choose Your Investment Accounts Strategically

With your foundation secure, it's time to allocate your investable severance across account types. This decision has major tax implications that compound over decades.

TFSA: The Flexibility Champion

For many severance recipients, maxing out TFSA first makes sense. You've already paid tax on the severance at your marginal rate. Putting it in a TFSA means all future growth is permanently tax-free, and you can access it during your job search without tax consequences.

RRSP: The Tax Arbitrage Play

RRSPs become especially valuable when you can contribute at a high tax rate and withdraw at a lower rate. This is where severance situations get interesting:

Non-Registered Accounts: The Overflow Strategy

After maxing TFSA and considering RRSP strategy, remaining investable severance goes to non-registered (taxable) accounts. These aren't inferior—they're just different:

• No contribution limits: Invest any amount
• No withdrawal restrictions: Complete flexibility
• Capital gains advantage: Only 50% of gains are taxable
• Canadian dividend credit: Eligible dividends taxed favorably
• Tax-loss harvesting: Offset gains with losses strategically

Step 3: Select Your Investment Strategy

With accounts selected, you need an investment strategy appropriate for your time horizon and risk tolerance. Severance investing requires balancing growth potential with the need for potential access during job search.

The Three-Bucket Approach for Severance

Recommended Investment Products for 2026

For most Canadians, low-cost index ETFs provide the best combination of diversification, cost-efficiency, and performance:

Step 4: Lump Sum vs. Dollar-Cost Averaging

You have a large severance cheque. Should you invest it all at once or spread it out? This is one of the most debated questions in personal finance.

The Data: Lump Sum Usually Wins

Studies consistently show that lump sum investing beats dollar-cost averaging about two-thirds of the time. Markets tend to go up, so being invested sooner means more time for compounding.

Recommended Approach: The 50/50 Split

For most severance recipients, consider investing 50% of your investable severance immediately (after emergency fund is secure) and dollar-cost averaging the remaining 50% over 6-12 months. This captures most of the statistical advantage of lump sum investing while providing psychological comfort and flexibility.

Step 5: Tax Optimization Throughout the Process

Severance investment tax planning extends beyond just choosing RRSP vs. TFSA. Consider these advanced strategies:

Asset Location Strategy

Put the right investments in the right accounts to minimize lifetime taxes:

• TFSA: High-growth assets (US stocks, aggressive ETFs) - growth is tax-free
• RRSP: Bonds, REITs, foreign stocks with high dividends - these would be taxed heavily in non-registered
• Non-registered: Canadian dividend stocks (eligible dividend tax credit), Canadian equity ETFs

The Lower-Income Year Opportunity

If you'll be unemployed for a significant portion of the year, your total income will be lower. This creates opportunities:

Common Severance Investment Mistakes to Avoid

Putting It All Together: A Complete Severance Investment Example

Next Steps: Your Severance Investment Action Plan

Conclusion: Transform Your Severance Into Long-Term Wealth

Receiving a severance package is stressful, but it's also a financial opportunity. The decisions you make in the first few weeks can set the trajectory for your wealth for decades to come.

The framework is straightforward: secure your foundation with an emergency fund, strategically allocate across TFSA, RRSP, and non-registered accounts, select low-cost diversified investments, and avoid the common mistakes that derail severance recipients.

Most importantly, take action. Analysis paralysis is the biggest wealth destroyer for severance recipients. A reasonable investment plan executed today beats a perfect plan that never happens.