How to (financially) transition from your job
Americans typically change jobs an average of twelve times in a lifetime. Data from early 2020 shows that the average employee stays with their employer for just about four years. At Mana, we’ve noticed that over the past six months, more of our clients have left their jobs for better pay, due to voluntary layoffs, for more competitive and comprehensive employee benefits, for continued career evolution, or because they’ve reached financial independence.
If you’re considering leaving your job, know that there is a financially optimal way to leave…which is where we come in. If you plan to change up your employment situation, here are some things you should keep at top of mind before your last day on the job.
Are you entitled to any additional compensation?
Before submitting my resignation in 2018, I took the time to understand the additional compensation I’d be entitled to upon leaving my firm.
Each state has laws around whether or not your employer is required to pay you for unused vacation days. In California, earned vacation days are considered wages. If you’ve been at your employer for several years, these days can add up!
If you’ve been working at your job for a while and you accept a voluntary (or involuntary) layoff, you may be entitled to a severance package. This can include things like a lump sum payment, continuation of health insurance for a certain amount of time, and outplacement services. Be sure to fully understand what your severance package entails before you sign any paperwork.
Job transitions and equity compensation
If you received stock compensation as part of your employment package, you’ll want to create a strategy to handle it before you leave your company. If you have options, we recommend reviewing - and having your financial advisor review - your post-termination exercise periods, which are usually three months from your last day of employment. In some cases, you have to exercise your options before you depart.
If you own stock (or options) in a private company as part of your employment compensation, consider the impact of the shares being illiquid, as well as if there are clawback or repurchase rights.
If you participated in your employer’s deferred compensation plan, it pays to review the plan documents and understand your choices - especially as to the distribution schedule you have chosen. Work with your financial advisor to consider your current and future circumstances - like your income, expenses and tax bracket - when making your distribution decision.
Next, you’ll want to consider the next steps for your retirement plan. If you have a 401(k) or other retirement savings plan through your employer, you will need to decide what to do with it when you leave your job. You can usually leave the money in the account, roll it over into an IRA, or cash it out (although we generally wouldn’t recommend this option, as you will incur taxes and penalties).
Do you need to reconsider your account structure?
When a client plans to leave their job, we encourage them to set up a meeting with us so we can strategize around cash flow. No matter your financial position, your income will be changing, so it makes a lot of sense to think about how your account structure will change in this transitory (or permanent) new reality.
If you plan on returning to work at some point, it’s a good idea to think about how many months your emergency fund and/or additional savings will be used to fund your expenses. In these situations, we find that the clients who have the most success are the ones who create automatic transfers from savings to their checking account, mimicking the feeling of a monthly or bi-weekly paycheck. If you’re stepping into your new financially independent life, we take this a step further and work with you to determine the most tax efficient withdrawal strategy from your investment accounts, also mimicking a monthly or bi-weekly paycheck.
Don't forget health insurance!
If you are leaving your job, you will need to find new health insurance coverage. This is one of the most overlooked (and the most expensive!) out of pocket costs we see after someone transitions out of the workforce. If you have a pre-existing condition, you may be able to stay on your employer's health insurance plan for a period of time under the federal COBRA law. However, COBRA can be expensive, so be sure to compare it with other health insurance options before making a decision.
Will you lose your health insurance? Weight the costs between COBRA and the healthcare marketplace - you have 60 days to enroll in the healthcare marketplace after leaving your job, or your spouse/partner’s health insurance plan. If you’re over age 65, you may be eligible to sign up for medicare if you haven’t already. The Special Enrollment Period for part A and B is an eight-month window, beginning the month after the earlier of the end of your employment, or the end of your employer-provided health insurance.
Other insurance may be portable!
If your company offers life insurance, accidental death or dismemberment, or long-term care insurance, you may actually be able to continue these benefits upon your departure, with an attribute called portability. If life insurance is portable, you typically convert the group life policy to a term policy without the need of a health exam, but you will take over the premium payments yourself. The cost may increase, so analyzing this versus an external policy is advisable. Examining your insurance needs, in conjunction with the insurance you receive in your new job, can help you decide if this makes sense for you.
Take advantage of a low(er) income year.
If your income will be lower this year as a result of leaving your job, there may be some financial moves worth considering. One action you might consider is a Roth conversion, where you convert some or all of your pre-tax retirement savings into a Roth IRA in a low income year. This is a good idea only if you have enough cash on hand to pay the income tax owed. If you have capital gains in your taxable portfolio - through concentrated stock exposure or long-held stock, as an example - a low income year might be the year to sell off some of these positions to generate cash or diversify your portfolio.
Bringing it all together
Job changes are normal, but being prepared ahead of making these changes can make the transition much smoother and comfortable. If you don’t yet have an emergency fund, this is the first thing we recommend setting up. This gives you flexibility if you ever decide to leave a job for some time off, or if you lose your job for a period of time. Keeping 3-6 months of expenses in a cash account, and an additional 3-6 months of expenses readily available in a taxable brokerage account, can give you the flexibility you need. If you are looking to switch jobs, we recommend a comparison of your full compensation package, 401k benefits, and other employer paid benefits (health insurance, disability insurance, life insurance, medical offerings) included, as you analyze your new job opportunities. Know what you’re leaving, and what you’re signing up for. No matter what the reason for your departure, don’t burn bridges. Know that job changes really are normal, and that the more professionally and cooperatively you leave, the better relationships you’ll have in business. Create an exit strategy that works for you personally, but also considers others. With financial preparation, and an amenable exit, you’ll enter your next stage of your career or life with confidence and peace of mind.
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Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.