How long might you be out of work?
Don’t underestimate how long it could take you to find a job. For the first five months of 2021, the average time it took an individual to find a new job ranged from 26 to 30 weeks.1 And people who are still actively employed tend to have greater success in getting hired than those of equal qualifications who are unemployed.2 The longer you remain unemployed, the more difficult it becomes to find a job, even if you start lowering your expectations.
Nearly 42% of unemployed people took more than six months to get hired1
How much time it takes to find a job
So, how long do you think you’ll be out of work?
- Are you going to hit the ground running on your job search, or are you planning to stay off the grid for a while?
- Do you intend to stay in the same field or industry?
- How selective will you be when opportunities present themselves?
Everyone’s journey is unique and will vary based on skillset and experience, among other factors, but how you answer those questions can add or subtract months from the amount of time you won’t be receiving a paycheck.
Do you have a good grasp on your spending habits?
How long can you afford to be out of work?
Having an updated budget and understanding your spending is good practice for personal financial management. The past 12 to 18 months, however, have been anything but normal. So, before moving on to the next question, consider looking at your spending habits from 2018 and 2019. Your spending on travel, entertainment outside the home, and cosmetics may have declined in 2020, but spending on personal care, food, and alcohol may have increased.3 If you’re planning to leave work, you’ll want to have a good understanding of what your budget will look like in the months to come.
Where will the money come from to pay for it all?
No matter where you’re getting the funds to pay for your expenses while you’re out of work, chances are you didn’t set aside money for this purpose and you’re taking it from some other financial goal. If that’s the case, consider how much time you’ll need to replenish the funds—and how urgently you’ll need to do so—once you have an income again. Make sure you consider the implications of your potential sources of funding:
- Emergency savings—This is a critical part of your financial health, and it should be replenished as soon as possible to serve its purpose—a financial emergency.
- Non-retirement investments—You should be aware of the potential tax impact associated with taking money out of different investment vehicles, such as a brokerage account.
- Retirement investments—Retirement savings are for retirement. Any money you take out early can be subject to taxes and penalties.
- Taxable distributions from your 401(k) plan before age 59½ are subject to a 10% distribution penalty (exceptions apply).
- Loans—Taking a loan or drawing on equity from your assets likely comes with an interest rate or financing expense.
You should consult your financial professional and tax professional to have a clear understanding of the impact of drawing on investments and retirement accounts.
What else will you be giving up?
401(k) contributions: When you leave your employer, you can no longer contribute to your 401(k) plan, which will cost you money in the long run.
For example, let’s say you make $65,000 per year, contribute 6% to your retirement plan, and earn a 7% rate of return. If you stop contributing to your plan for six months, you’ll have less money when you retire. If you have 20 years left until retirement, you’ll have lost over $8,000. If you have 40 years until retirement, you’ll have almost $33,000 less to use.
Stopping 401(k) contributions for six months adds up over time
Potential lost savings over time due to stopping contributions for six months
This is a hypothetical mathematical illustration only. Figures are based on assumptions as set out, and individual circumstances may vary. There is no guarantee that the results shown will be achieved. It does not take into account fees associated with the investment.
401(k) withdrawal: If you find yourself needing to rely on your 401(k) savings to live while you’re out of work, you’re taking money from your future. $20,000 in your retirement plan today can more than quadruple in 20 years and could grow to over $327,000 in 40 years. So, before you make a withdrawal and pay the potential penalty and taxes, think about the longer-term gain you’ll be giving up.
Taking $20,000 from your 401(k) plan today can add up to a much greater loss in retirement
The potential growth of $20,000 over time
This is a hypothetical illustration used for informational purposes only. There is no guarantee that the results shown will be achieved, and the assumptions provided may not be reflective of your situation. It assumes no withdrawals and does not take into account fees associated with the investment.
Company-paid benefits: When you’re out of work, you won’t be getting any company benefits. Although they can vary greatly by employer, the common benefits you may be losing include:
- Health and dental insurance—you’ll want to account for any increased cost of health insurance in your budget if there’s no alternative employer-paid solution (e.g., your partner’s employer)
- Life insurance
- Retirement accounts, including company match or other employer-paid contributions
- Education assistance
- Meals, snacks, and drinks
What are your answers to these important questions before you resign?
Leaving your job may be appealing, and may be the right move for you. Even if it’s the right move, make it carefully and thoughtfully. Make sure you consider how you’ll pay for your expenses, and how long it may last. And understand that there’s the risk that finding a new job will take longer than you expect. If there’s any truth to the “Great Resignation,” you won’t be alone when you return to the job market, and competition may be high. Having a clear understanding of your ongoing expenses, your source of money while you’re out of work, and the long-term impact to your savings will help you make an educated decision.
1 “Table A-12. Unemployed persons by duration of unemployment,” U.S. Bureau of Labor Statistics, 6/4/21. 2 “The social stigma of unemployment: consequences of stigma consciousness on job search attitudes, behaviour and success,” Journal for Labour Market Research, 7/12/19. 3 “How COVID-19 Has Transformed Consumer Spending Habits,” J.P. Morgan, 11/23/20.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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