Millions of Americans are leaving their jobs these days – and they don’t always have another one lined up.
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Whether it’s due to burnout, a desire for more flexibility or better pay, or the pursuit of an entirely different career, saying “I quit” can have long-term financial implications.
“Before you leave, there are things you want to do to prepare. And then after you leave, you are going to want to look at the short-term, intermediate and the long-term implications,” said Isabel Barrow, director of financial planning at Edelman Financial Engines.
Here’s what you need to know if you are considering quitting without another job offer:
Do a quick gut check
It’s a good time to be a job seeker, but make sure you are leaving for the right reasons.
“The grass is very often not necessarily greener,” said Tami Simon, a corporate consulting leader at employee benefits firm Segal. “Take the time to really think about what your own motivations are, and the real reason why you are thinking about leaving your job as opposed to just following a trend.”
If you are looking to leave because you’re seeking more flexibility, money, responsibility or you want to learn new skills, now’s the time to ask your current employer.
CALCULATOR: How much do I need to save for retirement?
“We have seen organizations learn how to be agile and flexible in a variety of different ways, certainly with their workforces,” said Simon. “If you want to pursue a new direction in your career and are thinking about going back to school, well maybe your employer would be interested in helping you pursue that and maybe even help fund it.”
Reaching out to a mentor or sponsor to discuss a possible change can also help provide some insight and clarity on the decision.
“Talk to your trusted advisers, the people that you can really count on to always have your back and always give you the honesty that you may not be able to determine for yourself,” said Simon.
Timing is everything
Remember all that paperwork that you got when you started the job? It likely includes information about any potential financial impacts of quitting.
Simon suggests reviewing your original offer letter, compensation arrangements and the employee manual before you announce your departure. “What are you contractually bound to?”
Sometimes benefits are awarded based on how long you’ve been with the employer, and offers could also include non-compete clauses or clawbacks of signing bonuses or other incentives if you resign before a certain period of time.
For instance, you might be anticipating a big payout for unused accrued paid time off, but according to Simon, laws vary in whether it has to be paid out.
“You shouldn’t assume that if you give two weeks’ notice and you have two weeks’ worth of vacation that you can just spend [it] sitting on the beach. Make sure you take a look at how that is structured within the organization.”
Leaving could also mean potentially losing out on bonuses.
“We are about to hit the end of the year, there can be end-of-year bonuses or incentives that come with that,” said Kristen Carlisle, general manager of Betterment 401(k) business. “While it’s tempting to make a change as fast as possible…think of that as part of your total compensation and something that can help you as you make a transition when leaving your job.”
Evaluate your budget
Job seekers have the upper hand right now, but it’s hard to know how long that will last.
“You have to look at the worst-case scenario,” said Barrow. “In six to nine months down the road after you’ve taken some time off, you don’t know what that job market is going to look like.”
Before walking away from a paycheck, create a budget that details your monthly cash inflow and spending. List all your non-discretionary living expenses, including housing, transportation, groceries, taxes, utility bills and any debts that would still need to be covered without a paycheck.
Carlisle recommended having at least three to six months of living expenses saved in addition to your regular checking, savings and retirement accounts. Barrow advised having 12 to 24 months of living expenses on hand.
“You really need to have a really strong cash reserve before you make the leap,” Barrow said. “While you are out of work…your fridge might need to be replaced, or [you may] need a car repair or a major dental expense.”
And if you are planning to take this time for expensive endeavors like traveling through Europe, Barrow recommended saving for it outside of your emergency fund.
She also suggested evaluating any debts – especially credit card debts. “You need to try and tackle that and get rid of it before you leave the job. What you don’t want to do is find out you have to make the choice between: ‘Do I pay my mortgage or do I pay my credit card bill?’ You want to get rid of some of those unsecured debts that might be at higher interest rates.”
Benefits: What are you giving up?
Leaving a job can also mean giving up other benefits, including health insurance.
“Most employees know that their employers offer heath insurance benefits, but they don’t necessarily always realize how much employers subsidize the cost,” said Simon.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) generally requires employers with more than 20 workers to offer a temporary extension of health coverage to former employees for a certain amount of time.
“Employers will sometimes subsidize the cost of COBRA, but most don’t,” said Simon. “And employers are permitted to charge up to 102% of the applicable premium for COBRA.”
She added that employers are required to provide a COBRA notice that details your rights and responsibilities, including coverage costs.
Another option is to find coverage on public health exchanges. You can review the options your state offers on healthcare.gov.
“[Health care] is a lot more expensive than people expect,” said Barrow. “It’s really important that you consider that as part of your overall budget before you leave your job.”
What about retirement savings
If you have a 401(k) at your soon-to-be former employer, you’ll have to make a decision on what to do with it.
You have a few potential options: You can leave it in your current employer’s plan if permitted, but you won’t be able to make any further contributions. Or you may be able to roll it into a new employer’s plan once you find a job.
You could also roll a 401(k) into an individual retirement account (IRA).
“Look into contributing into an IRA while you are between your jobs,” said Carlisle. “As much as you can save for retirement, it sets you up for success in the long haul.”
She added that you should make sure you are rolling the money over into a qualified account so you don’t get hit with fees.
Try to avoid dipping into your 401(k) early. “A lot of people look at that 401(k) as a potential slush fund … that is not a good option for most people outside of retirees. There are penalties involved and that pushes retirement back even further,” said Barrow.
You should also check to see if there are any vesting dates attached to your retirement plans.
“Do you have a pension that you are leaving on the table or are you not vested fully in your 401(k)?,” said Barrow. “Those are things you need to consider as well before you pull the trigger and leave.
