How to Save for a Career Break
The minute we start working, we start hearing the calls to save for retirement. Yet half of 18-34 year olds don’t save anything for retirement. Maybe the reason people ignore the advice is because retirement seems so far away. Perhaps the better advice when people start working is to save for a career break. Not only does a career break necessarily come well before retirement, but it’s something that can
Why Should I Prepare?
84% of millennials foresee taking an extended career break sometime in their lives. The most well-known career break is maternity leave. 49% of women take an extended maternity break and 75% of the women who didn’t, wanted to, but couldn’t afford to. Four in ten women said finances dictated the length of their career break and 64% would have taken a longer career break if not for finances.
Wouldn’t it be great if you could decide what was best for you, your family and for your career instead of what you could afford. Yes. Wouldn’t it be great to have the financial possibility to take some time off to rest, relax, or travel the world? Yes. You would be hard pressed to find a reason why saving for a career break, even if you never take one, would be a bad idea. Because even if you never take your career break, hey, you can move those savings toward retirement, which you should have been saving for anyway.
When Should I Start Saving for a Career Break?
Even if you don’t expect to have children any time soon, disaster (or opportunity) can strike at any time. In a best case scenario, someone might offer you an unbelievable once-in-a-lifetime opportunity, and if you just had your finances in order, you would have been able to take it.
Follow your significant other into Paris? Join in on a promising start-up in the ground stages? Try an exciting fellowship? Let your finances give you options rather than restricting you.
I remember during an internship, I was offered the opportunity, along with another intern, to travel to London for a trade show. Neither of us had up-to-date passports so they gave the trip to some intern from a completely unrelated department. You better believe that I have never let my passport lapse ever again. The same is true for having money saved for an opportunity. You don’t want to be in the situation of looking back thinking, if only I had saved a little money.
Figure Out How Much You Need
If you never take a career break, the extra money won’t go to waste. And you don’t even know if you’re going to be forced into a break. Worse case scenario – you have more money and thus, more options.
1. Don’t Let the Costs Deter You from Taking a Career Break
While writing this article, I serendipitously was sent another article on planning for a career break. That article advised calculating the total costs of your career break including lost promotions and retirement contributions, compounded over time. I think that’s actually a terrible idea.
If you’re taking or contemplating taking a career break, you are placing higher priority on something other than money or advancing your career. Otherwise, you would stay at your job and never take a career break. You don’t need to make enough money to put you at the same place as some hypothetical self that never took a career break. The purpose of planning for a career break is not to have the same amount of money but to use money to buy time. Further, it’s unlikely that you’ll be able to make as much money before or on your career break to make up for the lost income, making the calculation, at best, useless, and, at worst, demoralizing.
Saving for a career break is about creating options. But don’t let the numbers scare you. Sure, it’d be great to save a million by the time you’re 21, but that’s not realistic. You only need to save for the time you’re away for work – not for your whole life.
2. Overestimate How Long Your Career Break Will Be
Project a reasonable length of time for your career break, including time to search for and start a job. The Family and Medical Leave Act (FMLA) allows for workers to take 12 weeks of unpaid leave for reasons like maternity care. Some states have guaranteed maternity leave beyond what is offered by the FMLA. Further your company may guarantee more leave – including paid leave. But it may be tricky to assume you’ll still be at your company by the time you want to take leave.
In terms of ideal maternity length time, some research says that six months is the bare minimum, with many countries outside the U.S. offering an average of one year of maternity leave. If you’re planning for maternity leave for two kids, perhaps your goal should be to save for at least a 2 year break (even if you fall short of that goal). For planning a career opportunity like a Fulbright scholarship, the length of time you should aim for is a year. If you’re thinking of going back to graduate school, you should plan to save for one-four years.
2. Tally Your Current Budgets
It’s a mainstay of personal finance – you have to know how much money you’re spending. This is how much you are likely to spend on your year off. Yes, you might cut costs on your career break, but you don’t necessarily want to have to reduce your lifestyle. Plan to keep the same lifestyle when planning to save.
3. Estimate Your Projected and Upcoming Costs
Will you need to replace your car, phone, or computer soon? These are all costs that you will likely still need to incur whether you take a career break or not.
If you take a career break, you will likely have certain additional costs that you should plan to save for – such as health insurance if you can’t be placed on someone else’s plan. You may also need to arrange transportation costs in order to go to the grad school of your choice. Brainstorm all the costs you will have so you can have a complete picture of your career break. Again, you don’t necessarily have to save the full amount. You may have the option of loans (for example for graduate school tuition), but it’s good to save as much as you can for all incidental costs.
Save The Money
Now that you’ve got your goal number.
1. Reconsider Debt Payoff
Depending on your projected timeline, it might make sense to reduce your monthly debt payoff to the minimum amount so that you have more money now. Or you might consider ramping up your payoff in order to go debt-free into your break. For instance, if you are on an accelerated 5-year payment plan, but you are strongly considering taking a break within the next year, you may want to reduce your monthly spend so you have more money now. On the other hand, if you’re on a 10-year payment plan and plan to leave in 7 years, maybe you can think about paying off your loans early so that you can jump earlier.
By paying off my loans early, I saved $30,000 in interest payments. Plus I was able to use the money that would have gone towards paying my loans toward investing. At 6.8% interest, paying off your loans gives you a tremendous return on investment.
This student loan calculator will help you figure out how much you could ultimately save by paying off your loans early.
2. Consider Refinancing your Loans
If you decide to take longer to pay off your loans, you should consider refinancing your loans so that your interest payments are lower. This makes less sense to do if you’re going to pay off your loans early, but makes more sense the longer your debt repayment plan.
3. Consider Every Cost Compared to Your Career Break
It’s hard to compare your costs compared to retirement which is so far away. But you can be ruthless with your costs when you can compare that with following a dream of taking a break or opportunity. Do you really care that much about Netflix or takeout that you are forfeiting time with your newborn baby or pursuing valuable research in a foreign land? What are you really willing to sacrifice for potential serendipity?
4. Invest Wisely.
The investing calculus for a career break might seem different than saving for retirement. For instance, investing is a no-brainer for retirement because you need such a large amount of money for such a long period of time. Still, you need to grow your money and investing in the stock market is the most effective way to do that. Invest in index funds – not riskier individual stocks.
Conclusion – How to Save for a Career Break
The years of 40 years of continuous work until retirement are over. Modern workers are expecting multiple careers with multiple jobs incorporating breaks for graduate education, maternity and paternity leave, elder care, fellowships, starting one’s own business or any other number of opportunities.