Now more than at any time in recent history, massive numbers of workers are considering and seeking a new career path. Many are proactively retooling their skill set to be able to create financial stability for themselves and their families during the backdrop of global economic uncertainty and change brought about by the COVID-19 pandemic. Some may adopt a different focus in their current profession, while others may embrace a completely new career. Still others might take the opportunity to turn a side hustle or entrepreneurial idea into a new business.
If this describes your situation, you know all too well how much energy goes into pivoting and leaning in to a new career path, making it very challenging to find the time and resources to keep track of your financial plan. The reality? It will NEVER be more important for you to focus on your career decisions within the context of your personal financial plan. Every decision you make as part of your career change should be viewed from the lens of your personal financial needs not just for today, but also as part of your longer-term planning needs and goals before. These decisions are acutely important to your long-term financial stability.
Here are just a few key financial planning issues that are critical for you to integrate into your career change plans:
1. Access to benefits. Many of us have access to significant benefits through employment. As you change your work path, you should consider how your access to benefits will change. If you might lose important benefits that will no longer be available in your new career or job, think about how to obtain them on your own. Typical examples of important benefits you might need to replace will include health insurance, disability and life insurance. Reviewing these issues as part of your financial planning before you make career moves can help you determine if the career change you are considering is financially sound and affordable.
2. Consider the costs. If you are leaving a job with these types of key benefits that cannot be immediately replaced, determine whether any are portable and if so, what those costs will be. Portable plans are often more expensive than what an employee pays, so if needed, build realistic costs into your budget. This is especially key to those who are pivoting to self-employment with no available benefits. Pay attention to the deadlines that must be followed so you don’t miss the opportunities to hold on to essential benefits while you look for other, perhaps more affordable, options. Avoid insurance coverage gaps!
3. Check the details. Making sure you are correctly and fully signing up for all appropriate benefits at your next working situation is another important matter. From health, life and disability insurance choices to signing up for the new 401(k) or other retirement plans, be proactive and know what’s available and what decisions are best for you and your family. And don’t ignore the importance of accurately submitting your up-to-date beneficiaries for life insurance and retirement plans on the correct forms.
4. Continue to save. Your planning includes saving for your future, allowing you to build toward financial security and independence. If you are investing in a 401(k) and other plans through your current employer, how will you replace that going forward? Does your new employer have similar or better plans? If you are self-employed, what plans can you set up for yourself to replace those you will no longer have access to? How much do you need to save to meet your future goals? Address these matters before you leap to a new career path so you can adjust your choices and plans appropriately.
5. Review routinely. If you are leaving an employer with retirement plans, typically you will need to make decisions about rolling the assets you have accumulated into either an IRA rollover of your choosing or to your new company’s similar type of plan. However, if you are allowed and decide to keep plan assets as is, incorporate a routine investment review into your planning so that you stay on track with your portfolio management. Otherwise you could end up with a disjointed investment portfolio that will be untended and possibly out of sync with your needs, objectives and risk tolerance, or the changing times.
6. Run the numbers. Your new path might also present such possibilities as stock options of various types. Sometimes lower current pay is a trade-off for participating in these possible sources of additional wealth. But is it a trade-off you can afford? Until you run the numbers within your own planning goals and objectives, you will not know. Hope is not a plan!
7. Determine tax withholding. Another area that I often see neglected is the impact of taxation on career and job change. Underwithholding your income taxes is a landmine that can derail your future financial security. From the get-go, meet with your tax professional and financial advisor to determine what your withholding needs to be, if you need to pay estimated taxes (if you are self-employed or expect uneven income, this could apply to you) and review your tax situation regularly as this is an area of constant flux. Since many of us base our family budget planning against our “take home,” KNOW your true take home—it may not be what’s reflected on your paycheck or gross self-employment income!
8. Plan for windfalls. In your planning, determine how best to include uncertain compensation, such as bonus plans and options. You may not want to include these as “for sure” income sources, making certain that your plans are successful even without any windfalls. And if they do come to fruition, again, the tax planning on these additional proceeds is critical to your overall planning success.
One of the most important financial planning junctures in your life involves career and job changes. Being overwhelmed can cause paralysis at the worst possible time, so reach out to your valued CERTIFIED FINANCIAL PLANNER™ professional who is uniquely qualified to help you sort through all the critical decisions, helping you embark upon your new path with confidence.