Yesterday we took a look at how to determine if a career change is right for you and planning for the switch. Now that you have determined this is the right course of action it is important to look at how this will affect your finances.
Step 1 – Evaluate Your Current Situation
Clearly one of the most common reasons for changing jobs is to seek more income. Be sure to look at your current income and determine how much this needs to improve to meet your goals. While finding a new job with better income is great, you need to be prepared for the possibility that in order to obtain this job you may be faced with months in-between with reduced or no income. Some questions to consider when looking at the financial impact of changing jobs:
- What is my current income?
- Do I have emergency funds available that can cover 3 to six months of living expenses? If not will I have means to cover living expenses in the event of a period of no income?
- How will a job or career change affect my standard of living?
- How will this help me reach my long-term savings and retirement goals?
- Will the new position have the same benefits or will I need to rely on a spouse’s benefits?
Step 2 – Understand Benefits
It is easy to overlook benefits but they are a very important aspect of your total compensation package. Good benefits may not directly have a dollar value attributed to them yet their actual value can be significant. While most benefits are basics such as health insurance you also want to take into account life and disability insurance as well as paid time off, stock options or bonuses.
- Determine what benefits you may be able to keep or transfer.
- If leaving your job, what pay is owed to you? Are unused days off credited in pay or are they lost?
- Understand how stock options and pension benefits work.
Once you have determined what benefits you will be giving up and what benefits you may be receiving in the future you want to pay extra careful attention to medical coverage if you will not be covered under a spouse’s plan. Be sure to find out how long your current coverage will last and what your employer will cover.
Larger employers will generally offer COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage for up to 18 months after employment ends. Smaller employers may not be required to offer this extended coverage so it is important to check before leaving [Thanks to Alex for bringing that to my attention.] For more information and eligibility requirements you can find it at the Department of Labor.
Finally, be sure to take into account all of your retirement benefits. If you were previously working for a company that offered a pension or defined benefit plan you need to check the vesting schedule. Some companies allow you to fully vest pension benefits with as little as three to five years of service. If yours had a five year vest and you quit at four years and 10 months you could be giving up a retirement benefit.
This is also a good time to explore options for your retirement savings plan. If you had a 401(k) or 403(b) you will likely want to roll this money over into an IRA. Check with your current plan provider and obtain the paperwork necessary. It is also important to check on the vesting schedule of any company match money. Like the pension, it would be a big mistake to quit just before you vest your matched money.
Planning the Transition
Now that you have weighed all of your options in regards to benefits and compensation it is time to prepare for the transition. Tomorrow we will conclude with tips on how to make the transition as easy as possible.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
As far as "evaluate your current situation goes", I found it very helpful to track my daily expenses because spending as a "salaryman" (a Japanese Engrish word for corporate employee. Nominally male but that rampart being breached all the time!) was more free and easy than as a "home business owner" with well established monthly expenses.
I started doing this about a year before I left the mother ship - with the aid of that technological marvel known as "pen and paper". See pocketmod.com
And it really helped instill a beancounter awareness of "needs" versus "wants" which has been a godsend in keeping my dream afloat.
I'm glad you find this useful, thanks for the comment. And you're correct, make sure you check on COBRA and don't assume. I will re-word that bit above. Large employers will offer it, but smaller employers do not always meet the requirements and choose not to.
I've changed career paths twice in the last 4 years and jobs twice this year alone. I've learned some of these issues the hard way. I hope I don't need to change jobs again for many years.
I really like this series of articles - perhaps because they directly apply to my situation. :)
Also, be sure to check into the COBRA coverage, and don't just assume it's available. I know my employer does not offer it yet, despite being around 50 employees (we're right below the cut-off).