When it comes to leaving a job, there are a lot of financial considerations to be made. If you have been let go, you may be entitled to severance pay and unemployment benefits. If you are quitting, you will need to make sure that you have enough money saved up to cover your living expenses. Either way, it is important to have a solid plan in place before taking any further steps.

Once you have taken care of the immediate financial concerns, you can start thinking about the long-term implications of your decision. These are all important factors to consider before making any major life changes:

  • Are you able to afford retirement?
  • Do you need to find another job right away?
  • Will there be a lapse in your health insurance coverage?

Here are some considerations to keep in mind during a job transition along with some tips on how to maintain your financial vitality as you pivot. Make sure to discuss these with your financial advisor.

#1 – What do you do with your retirement assets?

When you leave your job, you have a few options for what to do with your 401k. You can cash it out, roll it over into an IRA, or roll it over into your new employer’s 401k. Rolling it over into your new employer’s 401k may seem like the simplest option, but it could also limit your ability to invest, diversify your portfolio, and take advantage of different market conditions. That’s because when you roll over your 401k, you’re generally limited to the investment options offered by your new employer.

If you’re looking to maintain a diverse portfolio, rolling over into an IRA may be a better option for you. This will give you more control over your investments and allow you to diversify your portfolio. You can choose from a variety of investment options, including stocks, bonds, mutual funds, or even real estate.

Keep in mind that rolling over a traditional 401k into a Roth IRA will require you to pay taxes on the money in the year that you make the rollover, but you don’t have to pay taxes on withdrawals after you retire. This can be a significant advantage, especially if you expect to be in a higher tax bracket when you retire. In addition, the money in your Roth IRA can continue to grow tax-free, which means it will have the potential to compound over time.

#2 – Does your insurance meet your needs?

An important financial decision when starting a new job is to evaluate your insurance coverage costs and benefits. This may include life, disability, and health insurance. Many employers offer group insurance policies, so you will need to start by understanding if this coverage is portable. If the group policy is not allowed to be moved, then you will need to explore options to ensure you are properly covered.

Another benefit that many employers provide is disability insurance. This insurance will replace your income should you become disabled and unable to do your job. In my experience, a group disability policy is extremely affordable, so I recommend you know your policy options before you leave your current company. Also, before deciding which policy to continue with, whether you’re transferring your existing one or getting a new one with your new employer, you should calculate how much income your family would lose if you could no longer provide for them. This includes not only your salary but also any benefits or bonuses that you receive. Then, consider any outstanding debts and obligations that your family would be responsible for, such as a mortgage or student loans, and factor in the costs of final expenses, such as funeral costs and estate taxes.

As for health insurance coverage, you’ll need to have a clear picture of your family’s financial and medical needs. Don’t let the price be the only factor in your decision-making process. Instead, focus on finding a policy that provides the right amount of coverage and benefits at a price you are willing to afford. Many companies will provide a bronze, silver, or gold health insurance plan, allowing you to evaluate what level of coverage works best for you. For example, if you go for a high-deductible health plan, you can consider having a health savings account or HAS. This is a tax-advantaged account that can be used to pay for eligible medical expenses. HSA contributions are tax-deductible, and withdrawals are tax-free if they are used to pay for qualifying medical expenses. Also, any unused funds in your HSA can be rolled over into the next year, and the account balance grows tax-deferred. This can represent thousands of dollars in saving in the long run.

#3 – What does your deferred compensation look like?

If you’re thinking about quitting your job, there’s another important thing you need to check first: your vesting schedule. A vesting schedule is a timeline for when you will be able to access your employee benefits, such as stock options or a pension plan. Vesting typically happens over a period of years, and if you leave your job before your benefits are fully vested, you may not be able to access them at all.

Before you hand in your notice, make sure you know how much of your employee benefits are vested and whether it’s worth staying at your job until they are fully vested. You may also want to negotiate a signing bonus, a higher salary, or other benefits at your new job to offset the loss of these funds.

#4 – Have your financial house in order before you jump out

First off, make sure you have savings in the bank. A good rule of thumb is to save at least 10% of your income. If you can save more than that, fantastic, go for it! Including savings in your financial plan now can make a big difference down the road. This will help you mitigate the blow of a financial emergency.

If you have been let go from your job, you may get extra cash from a severance payment, which is typically based on how long you have been with the company and your position within the company. If you are unsure whether you are eligible for severance pay, you should speak to your HR department or a legal advisor.

Also, if you’re considering switching jobs, a ROTH conversion (switching your traditional IRA to a ROTH IRA) may be a good idea. For one, it can help you get into a better tax bracket. With a traditional IRA, you’re taxed when you withdraw the money, which means that if you’re in a higher tax bracket when you retire, you’ll end up paying more in taxes. With a ROTH conversion, you’re taxed upfront, so if you’re in a lower tax bracket when you retire, you’ll end up paying less in taxes. So doing a ROTH conversion in a year when you have a gap in income may allow you to pay less tax on the conversion compared to other years when you have a full year of salary. With a ROTH conversion, you can also diversify your retirement portfolio while retirement savings in a traditional IRA are all subject to the same market risks.

Extra tip – Don’t leave your current company on bad terms

The Great Resignation phenomenon made job-hopping more and more common, becoming a huge economic trend. The reason why people have been quitting vary, from difficulty recovering from the pandemic effect to the need for better pay, opportunities for advancement, and recognition, many have ridden the wave to navigate better opportunities.

If you too are considering switching jobs, I kindly advise – both as a financial planner and employer – making sure you don’t burn any bridges with your current employer. After all, you never know when you might need to rely on them for a reference, a recommendation, or even a new job in the future. If you’re unhappy with your current situation, and you do decide to move on, be sure to give your notice in a professional and respectful way. This will not only give you peace of mind but also will help you to maintain a good relationship with your former employer and improve your chances of success in the future.

As the economy keeps sending mixed signals, I invite you to check out the Four Points Wealth Economic Report for 2022-2023 for insights on what is happening with the United States economy and how you can maintain your financial health even through tough times.

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