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July 31, 2010

The Finances of Career Transition

By Loraine Miller


This article was first published in NYWICI's print newsletter CONNECT in Summer 2005
 
One of the biggest fears that women face in rethinking their work life is the financial implications of making a change. With self employment, income can be irregular. With part-time work, income may be reduced substantially. And an entirely new career may mean an entry-level salary. Whichever route you choose, your transition at work is going to have an impact on your financial life that will need to be managed.
 
The best advice? Plan ahead. Ask yourself: If I want to make a career shift a year from now, what do I need to do in the meantime to make that financially viable? This question shifts the focus of your thinking from whether you can afford a change to how you are going to make one possible. That, in and of itself, is an important first step.
 
Here are 10 tips for a successful financial transition:
 
  • Determine how much income you will need for the next two to three years. Take inventory of your finances, and create a cash flow plan. Having a personal financial plan for the transition period will increase your confidence – and your odds of success.
  • Reduce your need for money during this period by distinguishing between a need and a want. Yearning to buy a new outfit? Buy yourself freedom to try a new direction instead.
  • Build up your reserves. Arrange to have part of your paycheck automatically deposited in a special account earmarked to finance your job change.
  •  Refinance your mortgage. Rates are still very low. The idea is to reduce your monthly payments and thus increase your disposable income.
  •  Do not tap into your retirement savings, your child’s education savings, or your credit cards to finance your transition.
  •  When you leave your job, you may be able to keep your 401K where it is, but this could limit your investment options. Most individuals would be better served by rolling the money over into an IRA, which offers more investment control. If your firm mails you a check for your 401K, you must deposit it into an IRA within 60 days or suffer heavy tax consequences.
  •  Create a diversified income stream to supplement your wages. Reallocate your portfolio to a growth and income strategy, with dividend-paying stocks and diversified fixed income which can be structured to provide a monthly check. 
  •  Be prepared for your new career’s total bill. Without a company plan, costs for Social Security, health, and disability insurance skyrocket. Don’t leave yourself uninsured. A disability can destroy the most thorough financial plan.
  • Continue saving for your retirement. Consistently funding an IRA every year is a must. If you are transitioning to self employment, options include SEPs, Profit Sharing Plans, and One Person 401Ks. All of these vehicles offer retirement savings as well as potential tax benefits.
  •  Taking a break from work altogether? Your spouse can contribute fully to a Spousal IRA for you, if you do not have earned income yourself. These funds belong to you alone, regardless of who made the contribution.
Successfully rethinking your career depends in part on your ability to manage the financial aspects. A professional advisor can bolster your confidence that you can achieve your dream, while being a good steward of your resources.
 
 Loraine Miller is an independent registered investment advisor and writes frequently on personal finance.