Are You Making a Career Transition? Keep These Financial Considerations in Mind
Making a career transition is considered one of the most stressful changes we deal with throughout our lifetime. Although a job change may lead to good things and growth opportunities, it can still be very stressful as you deal with the nuances of new options, a new work environment, and new co-workers to adjust to. I may not be able to help much on the culture aspect, but I can share a few key areas to address when you make a career shift to help be sure the bases are covered financially.
New group benefits
As you transition into a new company, one of the first things you run up against is a new open enrollment and entire benefits package to explore. The typical suite of benefits may include medical, dental, life, and disability coverages. But, also keep an eye out for the more nuanced benefits we see from time to time. Sometimes employers may offer long-term care coverage or assistance with legal benefits if you need to update wills.
Understanding your new benefits package and how to make the most of it for your specific needs is a vital part of planning and may take some thought each time you make a career change and change employers. Be cautious of simply electing the cheapest options. Often, if these benefits are chosen thoughtfully, they can play a significant role in your plan.
Health insurance and Continuation of Health Coverage (COBRA)
When you make a career transition, you will find you have an option to continue your health insurance coverage under COBRA or explore options with your new company’s health plan. COBRA is generally only good for 18 months and can be very costly as most of the premium costs will no longer be shared with your employer. Your new company may offer health insurance and provide an alternative to the expensive option of COBRA.
When evaluating your new firm’s health benefits, consider weighing the deductibles, out-of-pocket maximums, and co-pays against your annual medical needs. If the company offers an HSA, consider how this may be used as another savings vehicle to provide long-term tax benefits.
Group life insurance
Believe it or not, when you leave your employer, you typically will have options to continue the life insurance coverage you had with your previous company. Like COBRA, you may be eligible to continue your coverage, usually without proof of insurability. This often comes with a higher cost than what the marketplace may offer a healthy individual. However, if you find yourself in poor health and ineligible for new life insurance, your previous benefits may provide an opportunity to carry a personal policy still.
Sadly, I have been in this business long enough to see some unfortunate scenarios. A client of mine was diagnosed with a critical illness while working and not given much time. Of course, he left his job to focus on his health, but this benefit allowed him to leverage a death benefit to help his family after he passed, which he may not have had otherwise. There are usually two options; conversion and portability, which may dictate whether you can turn the policy into a term or permanent type of coverage.
401k choices
After changing jobs, you may no longer be tied solely to your previous employer’s 401(k) options. You have much more flexibility and can decide to leave your 401(k) where it is, roll over the funds into your new employer’s plan, or you can rollover your 401(k) to your own IRA. Often the advantages of keeping it with your previous employer or rolling it over to your new employer can be simplicity and costs.
However, you may typically only have a handful of funds to choose from in any 401(k), whereas an IRA may allow you to choose from a world of investment choices. The way these accounts are taxed is very similar, so you can determine which is best for you with minimal, if any, tax impacts in the future. The choice you make depends on your comfort level and whether or not you have an advisor to help you. Costs and investment choices are a couple of the more common considerations, but it’s also essential to explore how these strategies play into your plan. If you wanted to contribute or explore Roth conversions, you might be more limited with a 401k as compared to creating your own IRA with those funds.
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Now, don’t forget about your new employer’s 401(k). Taking advantage of any offered match is always a great starting point to allow for an extra return on every dollar you put in. The plan may also have both pre-tax and Roth options available, so exploring the best choices given your tax planning strategies is critical. All too often, we see individuals make decisions on their previous and new 401(k) plans that have negative impacts on their overarching plan. Understanding your choices in detail and how they may help or hurt your plan is critical in managing a job change.
Stock options and compensation plans
Especially for highly compensated individuals, equity compensation plans are a large part of your overall compensation. Understanding the ins and outs of any compensation plan offered to you and how to maximize your plan, given your other savings, tax strategies, and goals can be tricky but can, if done correctly, allow your entire plan to work cohesively.
Transitioning to a new job and culture
Although this isn’t my area of expertise, I would feel I was leaving out a crucial consideration if I didn’t touch on the cultural aspect of a job change. I will not share any advice in this field, but I will say culture is everything when starting a new endeavor. Spend some time getting to know your co-workers and understand how things operate currently so you can make the most of your next position while also making some friends and lifelong memories along the way.
It can be easy as you face a flurry of new information during a job change to make choices “off the cuff.” However, if you approach this career transition with some strategy, you can use these benefits and options to help enhance every other aspect of your planning.
If you find yourself in a job transition due to retirement specifically, check out these essential considerations to make as you transition to retirement. You can also reach out to us directly at any time to discuss other concerns in this next chapter of your life!