A Playbook On How To Transition To Another Career
Transitioning jobs can be an exciting but stressful time. Oftentimes, a job transition can represent moving closer towards an ideal employment situation. These transitions offer tremendous opportunities to help move closer to short and long term financial goals. As you evaluate your options, there are several key categories to consider to make sure you are making the right decision and are putting yourself in the best position to succeed.
Cash Flow and Emergency Funds Help To Smooth Out The Career Transition
As you are considering a career transition, you will want to have a good handle on current cash on hand to address any potential gap of employment or additional expenses that could arise from a job transition (moving / relocation expenses). 3-6 months of lifestyle expenses is typically advised to address cash outflows during this transitionary period.
Compare Your Old Career’s Comp To the New Career’s Comp Package
As you evaluate your new job opportunities, you will want to consider how the total comp package compares with your prior comp structure. A new comp package could mean improvements to take advantage of or steps back that you will need to be comfortable with and address.
Know The Base Salary Of The New Career
A key driver of the overall offer package, base salary helps set a baseline for ability to cover expenses, pay mortgage, save and invest for retirement.
Potential Cash Bonus’s Offered From the New Career
Performance cash bonuses can be utilized to address longer term goals if the majority of base salary is focused on day to day expenses / debt service / retirement contributions. Real Estate down-payment fund, college plan funding for children, paying down interest rate debt or padding nest egg for retirement can be great uses of performance bonuses depending on where you are at in your financial journey.
Know If Your New Career Offers Equity Compensation
Equity awards have become a larger component of overall compensation over the years, especially for technology companies. Equity compensation can range from restricted stock units (RSU’s), stock options (NQSO or ISO), and employee stock purchase plans (ESPP). These various plan structures allow employees to receive company stock or the ability to purchase company stock potentially at a discount. Stock awards follow a vesting schedule where you receive a portion of the total amount over a period of years as long as you maintain employment with the firm. If held after vest or exercise, the value of the equity will fluctuate with the stock price. Depending on the company and the trajectory from the time of grant/vest, equity compensation can prove very lucrative but is not a sure thing. Because of the variability of these plans, you will want to create a strategy for how much equity to hold after vest and what would dictate a sale of equity to lock in value. Interested in learning more about building wealth with the right mindset? Check out our blog post on The Right Mindsets To Build Wealth Like the Ultra Wealthy for in-depth insights.
Does The New Career Offer A Signing Bonus
Some firms will offer signing bonuses to remain competitive and supplement any deficiencies in comp especially in the early years to retain talent. AMZN is well known for utilizing cash signing bonuses to supplement total comp over the first two years of an employee’s tenure as their stock vesting schedules are much lighter up front. Signing bonuses can be utilized similar to performance bonuses for overall financial planning purposes. In the case of AMZN where signing bonuses can be much larger but paid out over time alongside base salary, additional strategies such as maximizing 401k contributions during this period of higher guaranteed cash flow should be considered as well.
401K Account Options After Leaving The Old Career
When transitioning jobs you will be introduced to a very important decision for your long term finances: how do you handle your old companies 401k plan and your new companies 401k plan? Depending on plan rules and how long you have been with the company, you will ideally have fully vested your employers contributions to your account. If this has not occurred yet and you are close to the full vest date, consider aligning your departure date and your job search around that date. Upon your transition, here are some additional aspects regarding your 401k to consider:
Leave 401K Where It Is After Leaving Your Former Career
The “do nothing” option simply keeps your current funds invested as they currently are in the existing 401k plan account. You will maintain market exposure according to your current investment allocation and will retain the ability to make changes to your investments within the plans allowed investment vehicles. You will not be able to make additional contributions to the account after your departure from the company. There is no tax impact for leaving the funds within the current 401k plan account.
Roll Old Career’s 401K to new company’s plan
Upon your start date with your new company and their plans eligibility rules, you are eligible to roll your prior 401k balances to your new company plan. This allows you to consolidate retirement assets within one account. A key factor to consider for this option is the investment vehicles offered within the new 401k plan. Once funds are rolled into the new 401k plan you cannot roll them out, so you will want to feel comfortable with the mix offered within the plan for the long haul.
Roll Old Company’s 401K to an IRA
Upon your separation from your initial company, you are also eligible to roll over your 401k account balances to an Individual Retirement Account (IRA). An IRA is not restricted to a set list of investment options, so you maintain flexibility from an investment management perspective. Your Rollover IRA will not impact your ability to continue to make contributions to your new companies 401k. Depending on your income you may be able to make additional contributions to your rollover IRA as well. Learn more about the five year holding period of Roth IRA.
Withdraw Your Old Career 401K balances:
You are eligible to distribute 401k account balances directly to yourself, though this is typically not recommended as distributed funds are taxed upon withdrawal and reduce overall retirement nest egg savings.
Contribution Percentage Upon Switching Careers
Upon your transition to your new company and setting up your new 401K plan account, one thing to keep in mind is the setting of your contribution percentage. Your new plan will have no knowledge of your year-to-date contributions to your prior plan. You will want to confirm how much you have contributed to 401k plans for the year and then back into what % would be ideal for your current comp to hit your targets for the year. Excess contributions to a 401k can be a difficult process to navigate and can be easily prevented if the proper precautions are taken.
Insurance Coverages When Switching Careers
Insurance coverage through your employer are another key piece to consider when making a job transition
Health insurance when switching careers
If there will be a gap between employers and as a result gap in healthcare coverage, you will want to evaluate the cost of COBRA to continue coverage from your current plan. Upon starting with your new company, you will want to evaluate if a PPO or HDHP with HSA could be a good fit for your family’s needs and overall cash flow.
Life insurancewhen switching careers
Life insurance is an important piece of your overall financial plan that can be easily overlooked during the job transition process. Your prior company’s group term life insurance is not portable and you will lose that coverage upon your transition away from the company. If this played a significant role in your overall life insurance coverage amounts, you will want to assess ways to replace this coverage ASAP. Company group term life insurance plans will oftentimes allow you to purchase additional coverage through them at a discounted rate, though the downside with this coverage is the lack of portability if you switched jobs again.
Job transitions can offer significant opportunity but can be fraught with complexity. As you consider your job transition options and how to gameplan, consider working with a financial advisor to help answer any questions you have and help you focus on finding and landing the job that is best for you and your family.