How should I financially prepare for a major career change?
Before a career change, build 6-12 months of expenses in savings, understand your health insurance options, and review how the income change affects your long-term plan. Consider the impact on retirement savings, especially if moving to self-employment. Don't forget about unvested stock, unused benefits, and 401(k) rollover options.
Career changes—whether voluntary or not—require financial preparation. Here's how to approach it.
Before you leave:
1. Build your runway 6-12 months of expenses in cash. More if your new income is uncertain or you're starting a business. This isn't negotiable.
2. Maximize current benefits
- Vest remaining stock options if possible
- Use FSA funds (they don't roll over)
- Get medical/dental work done
- Understand COBRA costs
3. Know your 401(k) options
- Leave it (if balance > $7,000)
- Roll to new employer's 401(k)
- Roll to IRA (most flexibility)
- Don't cash out (taxes + 10% penalty if under 59½)
Health insurance:
This is often the biggest concern. Options include:
- COBRA (expensive but continues current coverage)
- Spouse's employer plan
- ACA marketplace (subsidies depend on income)
- New employer's plan (waiting periods may apply)
If moving to self-employment:
Retirement accounts:
- SEP-IRA: Simple, up to 25% of net self-employment income
- Solo 401(k): Higher contribution limits, more complexity
- Don't neglect retirement savings just because it's not automatic
Taxes:
- Quarterly estimated payments required
- Self-employment tax (15.3%) on top of income tax
- Deductions available (home office, health insurance, equipment)
Income planning: Variable income requires different budgeting. Plan based on minimum expected income, treat excess as bonus.
The planning exercise:
Model scenarios:
- What if the new role pays less? Can you adjust spending?
- What if it takes 6 months to find the right opportunity?
- What if you start a business and it takes 2 years to be profitable?
Our approach: Career transitions are exciting but financially risky. We help clients stress-test their plans and make transitions from a position of strength, not desperation.