If you are among the millions of Americans who are contemplating a career change, be forewarned that it takes plenty of planning and, potentially, a pile of cash.
Indeed, a career change, at minimum, involves the opportunity cost of starting over on the salary ladder, not to mention the foregone promotions and retirement plan contributions from your former employer. ( Calculator: How much should I save for retirement? )
It may also require retraining, new credentials, or a different college degree, which can set you back six figures or more, especially if you need to take on loans to fund your living expenses while you retool.
That is not to dissuade, however. You cannot put a price tag on peace of mind.
If you are miserable going to work every day, the cost of a career change may well be worth the investment. Just be sure you plan ahead to minimize the impact it will have on your household budget.
“If this is something that is really important to you, you should do it, but do it in a deliberate way,” said Daniel D’Ordine in an interview, a Certified Financial Planner® professional with DDO Advisory Services in Rhinebeck, New York. “Figure out your budget and get a strong handle on your current spending so when you decide that you need to cut $5,000 or $10,000 from your annual budget, you know specifically where that is going to come from.”
Put your motives under the microscope
Career changes, or at least the desire for greener pastures, are hardly unique.
More than half (59 percent) of working adults are interested in changing careers, with nearly one quarter (24 percent) extremely or very interested in a career change, according to a 2015 Harris Interactive survey for the University of Phoenix.1
If you count yourself among them, some serious introspection is order.
“Ask yourself why you are doing this,” said Lynn Berger, a career coach in New York City, in an interview. “That’s the first thing you need to address.”
If it is because you do not like your boss, or employer, changing companies within the same field is an easy fix — and one that puts your professional experience to its highest use, she said.
If the goal is to pursue your passion, say, photography, cake decorating, or woodworking, consider whether you might be able to satisfy that itch by engaging in those activities as a hobby or a side business, without quitting your day job.
And finally, if you like your profession, but not your field, try deploying your skills and education in a different industry that gets you closer to your goal.
The objective, said Berger, is to capitalize on your transferrable skills.
“Look to see whether you may have something of added value to bring to the career you are pursuing; something that makes you more hirable,” said Berger. “That can make for a less costly transition.”
Do the math
You must also, of course, crunch the numbers to determine whether you can afford to live on your expected income — and keep the lights on during the transition.
As you calculate the cost of a career change, it is also important to consider the benefits you may be giving up, including insurance coverage, bonuses, or other perks, like tuition reimbursement, said Berger.
If you are moving from a large corporate job to a startup, for example, you may face higher premiums for lesser health benefits — or receive no benefits at all. (Hint: if you have health insurance through your current employer and your spouse’s employer does not offer benefits, you may need to factor in the cost of continuing health insurance under COBRA in your initial financial calculations. The Consolidated Omnibus Budget Reconciliation Act of 1985 grants former employees, their spouses, retirees, and dependent children the right to temporarily continue their health plan at group rates if coverage is lost due to certain specific events, including voluntary or involuntary termination.2
You may also receive fewer weeks of vacation, at least for the first few years, and incur different costs related to commuting, work attire, and child care.
“It is basic addition and subtraction,” said D’Ordine. “You need to know what your expenses are and compare that to your projected income.”
If the salary potential in your new career is not enough to live on, take heart.
You may be able to downsize to a smaller home or reduce your monthly expenses by dumping your gym membership or dining out less frequently.
“I am a big fan of annualizing your monthly expenses so you can see what cable, iTunes, restaurants, and vacation really cost you,” said D’Ordine. “For every $150 per month you eliminate, that’s $1,800 a year. You’d be blown away with how many thousands of dollars you can come up with.”
Remember, too, he said, that if you earn a lower salary, or head back to college, you will likely fall into a lower tax bracket.
“Suddenly, there may be deductions you can take advantage of that you might not have qualified for before,” he said, noting in dual-income families, where one spouse quits to start a home-based business, the need for child care may also disappear. “The net-net might not be so bad.”
If your income drops significantly, or temporarily disappears, you may also be able to sell some highly appreciated stock and avoid the capital gain, said D’Ordine. Talk to an accountant to assess your own tax implications.
The timing of your career move could also factor in, especially if you are not fully vested in your 401(k) company match. Employer contributions to a 401(k) may vest immediately, or over the course of several years on a percentage basis.
If you are six months away from being fully vested, for example, it may be wise to delay your career change for a bit longer — lest you leave free money on the table.
A home equity loan may also help cover the bills during your career transition, said D’Ordine — just be sure you secure the loan before you quit your job.
“If you need to borrow, do that while you still have an income because you are not going to qualify if you show zero income,” he said. “That goes for everything. If you are ready to buy an apartment, or need a new car, do it before you quit your job.”
Greg Olsen, a partner and Certified Financial Planner® professional with Lenox Advisors in New York City, offers one other word of wisdom for would-be career changers: “From a philosophical standpoint, a lot of times when you are not happy with what you do you surround yourself with ‘stuff’ you don’t need,” he said in an interview. “The guy who leaves his high-powered, high-stress job may realize that he does not need that Porsche after all. All of a sudden he is doing something that he loves and has work-life balance so he doesn’t need the car.”
If you sell a second home or downsize your primary residence to smaller digs, you can also potentially convert a portion of your proceeds into income by purchasing an annuity, said Olsen.
“For the first time in your working life, you’ll be without a paycheck or be living with a much reduced paycheck, so to the extent you can replace a portion of that salary with guaranteed income that could certainly make sense,” he said, noting it is important to continue investing for growth in your overall investment portfolio. (Learn more: Annuities)
Take, for example, a parent who wants to switch to a lower paying job, but has a 13- and an 11-year old to think about. He might consider purchasing a period certain single premium immediate annuity to supplement his income over the next 10 years while education expenses are unusually high, said Olsen.
The investment banker or law firm partner, on the other hand, who wants to quit her high-pressure job to teach college in 10 years might instead use her current salary or year-end bonus to purchase a deferred income annuity that will provide guaranteed income payments to cover fixed expenses when she changes careers.
“The annuity strategy you choose will depend on when your career change will be,” said Olsen. “The idea is to create a predictable income that can’t go down.”
Is it a fit?
Finally, before you throw in the towel on your current career, research the field you are planning to adopt, said Bergen.
What are the growth prospects in the industry? Will it meet your goals –— be they work-life balance, higher salary, or job stability? Is it a personality fit?
“Talk to people who are already in the field, join LinkedIn groups, and find professional associations so you can attend some of the meetings,” said Berger. “Look around. What kind of people work in the field? What are they talking about? Are their priorities in line with yours?”
Ideally, you should also spend a day or two shadowing someone who has the job you want. You may discover it is a perfect fit, or that it only sounded good on paper.
Starting over in a new career requires a financial cushion and a big leap of faith.
Be pragmatic, have a plan, and carefully consider the impact it will have on your household income. But don’t let money stand in the way, said D’Ordine, who himself facilitated a career change.
“My position is that life is utterly too short,” he said. “If your partner is on board and this is something that is really important to you, go for it.”
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This article was first published in September, 2016. It has been updated.
1 University of Phoenix, “Nearly Three-Fourths of US Workers in Their 30s Want a Career Change, Reveals University of Phoenix Survey,” July 29, 2015.
2 Department of Labor, “COBRA Continuation Health Coverage FAQs.”