Financial Impacts of a Job Change
Whether you’re considering moving to a new company within your field or changing careers altogether, it’s important to consider the short-term and long-term financial impacts of making the switch.
CHANGE IN SALARY - IMPACT TO YOUR MONTHLY CASHFLOW
Higher salary doesn’t always equate to higher take-home pay. Before accepting an offer, it’s important to look at the total compensation. Your new salary may be an increase, but the cost of medical insurance (for example) may be higher… netting a smaller paycheck than you currently bring home. Do you currently work for a company that covers the cost of life insurance premiums or tuition reimbursement? If the same benefits are not offered by your new employer, you could be left with higher out of pocket expenses.
Another thing to look at is how your new salary will impact your income taxes. An increase in salary can put you into a higher tax bracket. If you file jointly, don’t overlook the potential need to adjust withholding on both paychecks. An additional tax consideration is whether the city or state of your new employer will require additional withholding or filing. Some cities have a mandatory earnings tax regardless of your residential status. Some employers may offer work-from-home accommodations but file your business location as the company’s home office address. If you are not a resident of that state, you may have to file state taxes in both the state where you live, and the state of your employer.
CAREER CHANGE - IMPACT TO YOUR FINANCIAL FUTURE
A job change doesn’t always come with an increase in salary. If there’s one thing the Great Resignation taught us, job satisfaction and work-life balance are significant drivers when looking for a new career opportunity. Here are two important money matters if you’re considering taking time off during your transition or leaving a higher paying job.
· Ideally, you’ve got yourself covered by having 3-6 months of salary set aside to cover your short-term needs. Once you’re back to work, don’t forget to prioritize paying yourself back! You’ll appreciate your cushion for the next rainy day.
· Avoid the temptation to cash out your 401(k) or retirement savings plan. Taking money out of your retirement savings to cover short term expenses may seem like a good idea until you consider the overall cost. Don’t forget you’re losing out on future growth of the investments you cash out. Here’s an example of the impact of penalty and tax rates* on a distribution:
*Using 24% federal tax bracket, 1.2% local & state tax rates, 10% early withdrawal penalty for taking a distribution out of a retirement account prior to age 59 ½.
Working with your financial advisor during life events such as a job change can provide valuable insight and a much-needed sounding board to ensure you’re considering the short-term and long-term financial impacts. To quote Ella Fitzgerald, “Just don’t give up trying to do what you really want to do.”