How to financially prepare to quit your job

“Before you leave, there are things you want to do to prepare. And then, after you leave, you’ll want to look at the short-term, medium and long-term implications,” said Isabel Barrow, Director of Finance. Planning at Edelman Financial Engines.

Here’s what you need to know if you’re considering resigning without another job offer:

It’s a good time to be a job seeker, but make sure you’re leaving for the right reasons.

“The grass is often not necessarily greener,” said Tammy Simon, head of corporate advisory at employee benefits firm Seagal. “Take the time to really think about what your motivations are, and the real reason why you might consider leaving your job rather than just following a trend.”

If you’re looking to leave because you’re seeking more flexibility, money, or responsibility, or you’d like to learn new skills, now is the time to ask your current employer.

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“We’ve seen organizations learn to be agile in a variety of different ways, certainly with their workforce,” Simon said. “If you want to follow a new direction in your career and are considering going back to school, perhaps your employer would be interested in helping you pursue that and possibly helping fund it.”

Reaching out to a mentor or sponsor to discuss a potential change can also help provide some insight and clarity about the decision.

“Talk to your trusted advisors, the people you can really count on to always support you and always give you honesty that you might not be able to define for yourself,” Simon said.

Timing is everything

Remember all those papers you got when you started working? It will likely include information about any potential financial effects of quitting smoking.

Simon suggests reviewing the original offer letter, compensation arrangements, and employee handbook before announcing your departure. “What are you contractually bound by?”

Sometimes benefits are awarded based on how long you’ve been with your employer, and offers can also include non-competitive clauses, bonus signing offenses, or other incentives if you quit before a certain time period.

For example, you might expect to pay significant compensation for unused paid time off, but according to Simon, laws differ on whether or not it should be paid.

“You shouldn’t assume that if you give two weeks’ notice and have two weeks off that you can only take it on [it] Sitting on the beach. Be sure to take a look at how this is organized within the organization.”

Leaving could also mean the potential for rewards to be lost.

“As we’re nearing the end of the year, there could be year-end bonuses or incentives that come with that,” said Kristen Carlisle, general manager of Betterment 401(k) business. “Although it’s tempting to make a change as quickly as possible…think of this as part of your total pay and something that can help you make the transition when you leave your job.”

Evaluate your budget

Job seekers have the upper hand right now, but it’s hard to know how long that will take.

“You have to look at the worst-case scenario,” Barrow said. “In six to nine months down the road after you take some time off, you don’t know what this job market is going to look like.”

Before walking away from your paycheck, create a budget that shows your monthly cash flow and spending. List all non-discretionary living expenses, including housing, transportation, groceries, taxes, utility bills, and any debts that you still need to cover without pay.

Carlisle recommended saving at least three to six months of living expenses in addition to 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 take that leap,” Barrow said. “When you are out of work… your refrigerator may need replacing, or [you may] Need a car repair or major dental expenses.”

And if you plan to spend this time on expensive endeavors such as traveling through Europe, Barrow recommended saving outside your emergency fund.

She also suggested evaluating any debt – especially credit card debt. “You need to try to process that and get rid of that before you leave the job. What you don’t want to do is know that you have to choose between: ‘Do I pay my mortgage or do I pay my credit?’” Card bill? You want to get rid of some of that unsecured debt that might have higher interest rates.”

Benefits: What are you giving up?

Leaving a job could also mean giving up other benefits, including health insurance.

“Most employees know that their employers offer health insurance benefits, but they don’t necessarily realize how much subsidies their employers pay for the cost,” Simon said.

The Comprehensive Uniform Budget Adjustment Act (COBRA) generally requires employers with more than 20 workers to provide a temporary extension of health coverage to former employees for a certain period of time.

“Employers will sometimes subsidize the cost of Cobra, but most don’t,” Simon said. “Employers are allowed to charge up to 102% of the premiums applicable to COBRA.”

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She added that employers are required to submit a COBRA notice detailing your rights and responsibilities, including coverage costs.

Another option is to find coverage for public health exchanges. You can review options offered by your state at health.gov.

“[Health care] It’s much more expensive than people expect, Barrow said. “It’s really important that you consider that 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 will have to make a decision about what to do with it.

You have a few potential options: You can leave them in your current employer’s plan if they allow you, but you won’t be able to make any other contributions. Or, you may be able to enter it into a new employer’s plan once you find a job.

You can also convert your 401(k) into an Individual Retirement Account (IRA).

“Look at contributing to the IRA when you’re in between your jobs,” Carlisle said. “As much as you can save for retirement, it sets you up for long-term success.”

She added that you should ensure that the funds are transferred to an eligible account so that you are not exposed to fees.

Try to avoid getting caught up in your 401(k) early. “A lot of people view a 401(k) as a potential reserve fund…that’s not a good option for most people outside of retirees. There are penalties involved and this pushes retirement even further,” Barrow said.

You should also check to see if there are any due dates associated with your retirement plans.

“Do you have a pension that you leave on the table or are you not fully due in your 401(k)?” Barrow said. “Those are things you need to think about as well before you pull the trigger and leave.

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