Key Financial Decisions to Consider Before Changing Jobs
You’ve made the big decision to switch jobs. Maybe you’ve outgrown your current position or have concerns about your department’s long-term stability. Whatever the reason, there are some important financial choices to make. Before jumping ship, it’s a good idea to:
- Make a plan to deal with any potential income gaps.
- Find temporary health insurance until coverage with a new employer kicks in.
- Determine your access to disability and life insurance coverage.
- Decide what you’ll do with your retirement account.
These decisions come with some significant financial consequences. That’s why working with a financial advisor before any job move is a good idea. Together, you’ll be able to navigate all the options – and make your best choices. Here are four key issues to prepare for when changing jobs.
Bridging the gap between paychecks
If you’re switching employers, it may be some weeks before you receive your first paycheck. And if you leave a position before landing a new one, the delay could be a month or more. Helping you fund the transition from one job to the next is exactly the kind of thing an emergency fund is designed to do.
Do you have enough savings? The usual recommendation is to stash three to six months’ worth of living expenses in a separate savings account. You may need more or less, depending on your situation and other sources of household income. For example:
- Solo earners might need to save six to 12 months’ worth of expenses, compared to three to six months for a dual-income couple.
- Workers in fields with high job security might get by with saving two to four months’ worth of expenses, while those in industries sensitive to swings in the economy might need a fund that covers six to nine months.
If your savings fall a bit short and you haven’t left your job yet, take this time to pad your emergency fund.
Finding temporary health insurance
Some employers allow new workers to immediately enroll in their health plan, while others have a waiting period of up to 90 days. If your new employer delays enrollment, you will need to find temporary coverage.
Under the federal COBRA law, you can continue coverage under your old plan for up to 18 months if your employer has 20 or more workers. (Most states have “mini-COBRA” laws that require smaller employers to offer temporary coverage to former employees.) But coverage under COBRA can be expensive because you can be charged the full cost of insurance plus an administrative fee.
Besides COBRA, you may have other options, too. For example, you may be able to be added to a spouse’s or partner’s workplace plan. Alternatively, you can purchase coverage through your state’s marketplace (available through HealthCare.gov) or buy a short-term policy, with more limited benefits, sold by insurance companies in most states.
Revaluating disability and life insurance benefits
Many workers receive free or discounted group disability and life insurance as part of an employee benefits package. Even when employers provide this coverage, however, the amount often isn’t enough protection for many workers with families. A job change is a good time to assess whether you’re adequately insured.
After all, your ability to earn a living is among your most valuable financial assets – and one that some workers may take for granted. The chance of death or disability from age 20 to normal retirement age is 30% for women and 35% for men.1
During your coverage review, keep in mind that disability and life insurance fill different needs.
If you are seriously sick or injured and are unable to work, a disability income insurance policy can pay you a monthly benefit that replaces 50% to 70% of your income – enough to keep up with mortgage payments, groceries and other necessities while you recover. Payments under a short-term disability income insurance policy can begin immediately following a qualifying disability and last for less than a year. A long-term disability income policy helps in cases in which the disability will last longer than six months. After an elimination period that may last a month or longer, a long-term disability policy can replace a portion of your income for two years or up to age 65.
Life insurance, on the other hand, is for the big obligations and dreams you have for your family. For example, life insurance can cover living expenses, so a surviving spouse can afford to stay home with young children. Later, it can cover the kids’ college bills. And it can provide a retirement nest egg for your surviving spouse.
An advisor with insurance expertise can help you determine the right amount of coverage to meet your obligations and your family’s needs.
Managing your workplace retirement account
When it comes to your workplace retirement savings, you have several options. The right one for you may depend on the investments a retirement plan offers and how much control you want over your account. Among your choices:
- Keep your money where it is. You’re entitled to stay in a former employer’s plan if your account exceeds $5,000. (For smaller balances and depending on the plan, an employer can roll your money into an IRA on your behalf or, if the account is $1,000 or less, write you a check.)2 One reason to stick with a plan is if it has more investment options with low fees. Also, if you’re leaving your job in or after the year you turn age 55, you can take distributions from your 401(k) or 403(b) before age 591⁄2 without triggering a 10% early withdrawal penalty, but the distribution may still be taxable*.
- Roll the money into your new employer’s retirement plan, if allowed. Provided the new plan has good investment options and reasonable fees, this option has a couple of advantages. It can be simpler to track your retirement investments if you consolidate accounts. You may also maintain the ability to borrow against your retirement account if your new plan allows it. Plus, older workers don’t have to take required minimum distributions (RMDs) from a current employer’s plan once they turn age 72. If they left their 401(k) with their former employer or roll it into an IRA, they may need to take RMDs from it.3
- Roll your retirement money into an IRA. A direct rollover to an IRA allows you to retain your tax-deferred growth potential with no immediate taxes or IRS penalties due. You may also enjoy a wider array of investment choices and more control over your assets.
- Cash out. This may be tempting because you’ll have immediate access to your savings. But you may owe income tax on the distribution, as well as an early withdrawal penalty depending on your age. And your money will no longer grow tax deferred, which can mean a smaller nest egg for your retirement.
**Please note that retirement account planning, including securities and advisory services, are provided by Registered representatives and Investment advisor representatives.
How to confidently manage your job transition
Changing jobs is a big – and often exciting – decision. But it prompts some important financial steps you’ll need to take during the transition. A trusted financial advisor can help you clarify the options and focus on taking the actions that make the most sense for you.
Learn how disability insurance can protect one of your most valuable assets – the ability to earn an income.
1 Disability And Death Probability Tables For Insured Workers, Social Security Administration, June 2020.
2 Rollovers of Retirement Plan and IRA Distributions, IRS.gov, Jan. 21, 2021.
3 Retirement Topics — Required Minimum Distributions (RMDs), IRS.gov, Sept. 23, 2020.
* Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice. Consult the appropriate professional regarding your situation.
Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.