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The pandemic forced many to reevaluate the role of work in their life, whether it was women who found themselves juggling childcare duties and a remote job or low-wage and essential employees who had to work in-person during the height of the pandemic. Many found themselves struggling with burnout and some questioned the conventional wisdom that people have to work for 50 years before retiring.
If you've found yourself fantasizing about taking time off to write a novel or complete a cross-country road trip, taking a career break might be a possibility. While retiring well before you're able to collect full Social Security and Medicare benefits might not be financially feasible for you, a career break or a sabbatical could 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 job and taking a career break.
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First off, taking an extended career break isn't an option for most Americans: A May 2021 Federal Reserve survey found that 35% of adults could not cover a $400 emergency expense with cash or its equivalent. If you don't already have an emergency fund or retirement savings, you'll have to prioritize building up your emergency fund, maximizing your 401(k) employer match (if they offer it) and/or 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 upon during their career break and a traditional emergency savings fund. You'll want to determine your monthly living expenses and multiply that by the number of months your career break will be to understand how much you need to save.
For example, if you're planning on taking a one year career break, you'll want to have a year's worth of living expenses saved up in addition to an emergency fund with three to six months worth of living expenses. While it might not be necessary for everyone to save three to six months worth of expenses, Ginty suggests that people have a nest egg to fall back on. If it takes you a lot of time to find a job after your career break, you'll want to have liquid savings to fall back on for your extended period of unemployment.
Starting to save for a career break can be as simple as transferring a small amount of money into a high-yield savings account each month. Unlike a traditional checking or savings account, a high-yield savings account offers a higher interest rate which is tied to the Federal Reserve's benchmark interest rate.
With a high-yield savings account, you can typically withdraw money up to six times a month (without having to pay a penalty fee), so your money is liquid in case of an emergency. Select chose Marcus by Goldman Sachs High Yield Online Savings account, Ally Online Savings Account and Synchrony Bank High Yield Savings as some of the best high-yield savings accounts.
You can also use a robo-advisor like Wealthfront to assist you in planning for a career break. Wealthfront offers users a 'time off' feature which helps understand how much a career break would cost (in the short term and long term) and whether it's financially feasible. Wealthfront will also help you decide which savings or investment accounts you should allocate money towards depending on when you plan on taking a break.
Lastly, Ginty and O'Connell Rodriguez urge people not to raid the retirement savings from their 401(k) or IRA. According to them, you should save separately for retirement and for your career break.
By withdrawing funds from your retirement accounts early, you might have to pay additional taxes. Early withdrawals from a 401(k) or IRA will incur a 10% penalty tax on top of your normal income tax.
While people can withdraw from their IRA and Roth IRA before age 59 and ½ without paying a penalty or income tax for select qualifying reasons (like education or medical bills), O'Connell Rodriguez notes that by withdrawing money from your retirement accounts now you'll be missing out on the potential of earning long-term compound interest on your investments.
Beyond understanding how much money you'll need to save, you'll also need a plan for paying off your mortgage or your monthly rent.
If you're planning to travel during your career break, you may need to cover your housing costs while you're away, says Ginty. For example, if you have a mortgage, you may rent out your home out. If you're renting, you might consider subletting.
You'll also want to consider other essential expenses such as health insurance. If you're currently receiving health insurance through your employer, you might 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 to employees of businesses with 20 or more employees. Through COBRA, individuals who have voluntarily or involuntarily left their job or have had their hours reduced, can extend their group health insurance coverage for 18 or 36 months.
However, COBRA typically comes with a steep cost — while your employer likely paid a portion of your coverage before, with COBRA, you'll have to pay the entire insurance premium and (typically) a 2% administration fee.
Depending on your income or living expenses during your career break, you may also be eligible for subsidized health insurance coverage through the ACA.
Before you quit your job to pursue your passion project or take a well needed 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 you plan on doing after your career break, says Ginty.
Will your employer allow you to return to your job? What happens if the labor market takes a downturn and you're unemployed for a longer period of time?
Planning for a career break requires you to consider what could happen in the worst-case scenario and to financially prepare for it. By saving for your career break, building up an emergency fund and figuring out how you'll cover your housing and healthcare costs, you may be able to prepare for that worst-case scenario.
Information about Marcus by Goldman Sachs High Yield Online Savings has been collected independently by Select and has not been reviewed or provided by the banks prior to publication. Goldman Sachs Bank USA is a Member FDIC.