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The pandemic has forced many people to reassess the role of work in their lives, whether they are women who have found themselves juggling childcare duties and remote work, or low-paid employees. and essentials that had to work in person during the height of the pandemic. Many have found themselves struggling with burnout and some have questioned the conventional wisdom that people have to work for 50 years before they retire.
If you dream of taking time out to write a novel or take a trip across the country, a career break might be a possibility. While retiring long before you can receive full Social Security and Medicare benefits might not be financially feasible for you, a career break or sabbatical may be a better option.
Select spoke with Barbara Ginty, CFP® and host of the Future Rich podcast, and Stefanie O’Connell Rodriguez, host of the Money Confidential podcast about what people should know before quitting their jobs and taking a career break. .
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How much will you need to save?
First of all, a prolonged career break is not an option for most Americans: The May 2021 Federal Reserve survey found that 35% of adults could not cover an emergency expense of $ 400 with cash or its equivalent. If you don’t already have an emergency fund or retirement savings, you will need to prioritize building up your emergency fund, maximizing your employer 401 (k) (if they offer it). ) and / or by opening a Traditional or Roth IRA.
Ginty recommends that people create two separate savings goals if they decide to quit their job: a fund to draw on during their career break and a traditional emergency savings fund. You’ll want to figure out your monthly living expenses and multiply them by the number of months in your career break to figure out how much you need to save.
For example, if you plan to take a one-year break from your career, you’ll want to save a year of living expenses in addition to an emergency fund with three to six months of living expenses. While it might not be necessary for everyone to save three to six months of spending, Ginty suggests that people have a nest egg to fall back on. If it takes a long time to find a job after your career break, you’ll want to have cash savings to rely on during your long period of unemployment.
Starting to save for a career break can be as easy as transferring a small amount of money each month to a high yield savings account. Unlike a checking account or traditional savings account, a high yield savings account offers a higher interest rate which is linked to the benchmark interest rate of the Federal Reserve.
With a high yield savings account, you can usually withdraw money up to six times a month (without paying a penalty), so your money is liquid in an emergency. Select chose the Marcus by Goldman Sachs High Yield Online Savings Account, Ally Online Savings Account and Synchrony Bank High Yield Savings Account among the Best High Yield Savings Accounts.
You can also use a robo-advisor like Wealthfront to help you plan for a career break. Wealthfront provides users with a “time off” feature that helps understand how much a career break would cost (short and long term) and whether it is financially feasible. Wealthfront will also help you decide which savings or investment accounts to allocate money to based on when you plan to take a break.
Finally, Ginty and O’Connell Rodriguez urge people not to plunder their 401 (k) or IRA retirement savings. According to them, you should save separately for your retirement and for your career break.
By withdrawing funds from your retirement accounts earlier, you may have to pay additional taxes. Early withdrawals from a 401 (k) or IRA will incur a 10% penalty on top of your normal income tax.
While people can withdraw from their IRA and Roth IRA before the age of 59.5 without paying penalty or income tax for certain qualifying reasons (like education or medical expenses) O’Connell Rodriguez notes that by withdrawing money from your retirement accounts now, you will miss out on the possibility of earning long-term compound interest on your investments.
What other factors should you consider?
Along with understanding how much money you’ll need to save, you’ll also need a plan to pay off your mortgage or monthly rent.
If you plan to travel during your career break, you may need to cover your accommodation costs while you are away, Ginty explains. For example, if you have a mortgage, you can rent out your house. If you are a tenant, you may want to consider subletting.
You will also want to consider other essential expenses such as health insurance. If you currently have health insurance through your employer, you can opt for a new plan through the Affordable Care Act (ACA), Medicaid or choose to extend your coverage through the Consolidated Omnibus Budget Reconciliation Act, also known as COBRA.
COBRA is available for employees of companies with 20 or more employees. Through COBRA, people who have voluntarily or involuntarily left their job or seen their hours reduced, can extend their group health insurance coverage for 18 or 36 months.
However, COBRA usually comes at a high cost – while your employer has likely paid part of your coverage before, with COBRA you will need to pay the full insurance premium and (usually) a 2% administration fee.
Depending on your income or living expenses during your career break, you may also be eligible for ACA-subsidized health insurance coverage.
At the end of the line
Before you quit your job to pursue your passion project or take a well-deserved break, you’ll need to make sure your finances are in order by determining how much you’ll need to save and what hidden expenses you’ll need to cover during your career break. You should also have an idea of what to do after your career break, says Ginty.
Will your employer allow you to return to work? What if the job market slows down and you are unemployed for a long time?
Planning for a career break requires that you think about what could happen in the worst case scenario and prepare financially for it. By saving for your career break, building an emergency fund, and figuring out how you will cover your housing and health care costs, you may be able to prepare for a worst-case scenario.
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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.