Managing the financial impact when you change paths.
When Workopolis recently asked Canadians how many career paths they had followed, just one in four replied “one.” A clear majority had switched directions at some point – whether because they had discovered a new field they felt passionate about, or because they hit roadblocks such as alack of advancement, cutbacks or layoffs.
So, if you are contemplating a career change, you’re not alone. And whether a leap into another profession is by choice or necessity, smart financial planning can help protect your household budget and keep you on track towards a comfortable retirement.
Build your skill set
Your transition may be just around the corner – after all, nearly half of employed Canadians (45 per cent) expect to change jobs or careers during the next five years. Yet 29 per cent don’t feel ready for a new line of work based on the skills they currently have. One way to prepare for a career change – whether it’s anticipated or not – is to deepen existing transferable skills and acquire new ones.
Workplace and government funding
Your employer may offer opportunities to attend free in-house workshops and seminars. If you can make a case for it, your organization may even pay or share costs for you to enroll in external programs. However, an employer isn’t likely to approve your request to study something that’s entirely unrelated to your current job, so if you’re headed in a new direction you may have to look for other sources of financing.
Government support may be available to help with the costs of retraining. The federal government’s Skills Boost program, for example, provides grants and loans for education for those who qualify. Your provincial or territorial government may offer assistance as well. If not, you may have to dip into your own savings.
While Registered Education Savings Plans (RESPs) are usually set up for children, you can set one up for yourself to save money specifically for retraining in an eligible full-time or part-time program. You won’t receive Canada Education Savings Grants (CESGs), which are not available after age 17. However, you can take advantage of tax deferred investment growth, which can help you build education savings faster.
You can also borrow up to $20,000 (up to $10,000 within a calendar year) from your Registered Retirement Savings Plan (RRSP) through the Lifelong Learning Plan if you enroll in an eligible full-time program. You do not have to pay tax on the amount you withdraw as long as you repay it according to the schedule set by the Canada Revenue Agency. As with an RESP or RRSP, money compounds without taxes inside a Tax-Free Savings Account (TFSA), with two important additional benefits. You can withdraw any amount tax-free, and you’re not limited to studying in an “eligible” program. A TFSA can work well alongside an RESP and/or the Lifelong Learning Plan, providing an extra source of money with no strings attached.
And, of course, savings in non-registered accounts are also available to you if you need them – just be aware that selling investments outside a registered plan may trigger taxable capital gains.
Prepare for the financial impact
Even if you don’t need to go back to school, changing careers can have significant financial consequences. You can soften the impact by planning ahead. Given how common career changes are, it’s probably a good idea for every Canadian to implement at least some of these strategies.
Strengthen finances so they can handle a drop in income
Many Canadian households are close to the edge when it comes to their finances. Nearly half (47 per cent) are living paycheque to paycheque, saying they’d struggle to meet financial obligations if they received a paycheque even one week late. Yet a career change may involve a drop in income if you’re unemployed for a period of time, earn less as you start up a new venture or take a pay cut to pursue your dream job.
To make your finances more resilient and able to withstand a period with less income, consider:
- Trimming expenses so there’s more money left at the end of each month
- Working to pay down your debt to reduce your interest payments
- Setting up a line of credit as a source of lower-interest funds if you need them
- Building an emergency fund in an easy-to-access bank account
With stronger finances, you’ll have more flexibility to make career decisions without worrying about how you’ll pay this month’s bills.
Research alternatives to your employer benefits plan
Changing careers may mean less or no health benefits coverage. If you’re moving from one large company to another, your benefits may stay at a similar level. But if you’re going from a large company to a start-up or are joining the “gig economy” as an independent contractor, freelancer or consultant, you may not have any health benefits at all.
You may want to consider a supplemental individual health and dental plan to help cover expenses like prescription drug costs and dental check-ups. Some plans come with additional benefits such as vision care, as well as extended health care to cover massage therapy, physiotherapy, hospital stays and more.
There are plans for people who recently had benefits through work that offer guaranteed acceptance with no medical questions, and others that ask you about health background. Whichever plan and level of coverage you choose, you can “own” your health benefits.
Consider other types of protection too
Depending on your circumstances, you may want to protect yourself and your family with other types of insurance as well. As with health benefits, there are advantages to owning your own coverage.
Your advisor can help you decide if you need:
- Disability insurance, which helps replace your income if you can’t work due to an unforeseen disability
- Critical illness insurance, which pays a lump sum if you’re diagnosed with an unexpected illness, so you can focus on recovery
- Life insurance, which pays a lump sum to give your family financial flexibility in the event that you pass away and they can no longer rely on your income
A basic level of protection is especially important if your career change means you no longer have any of these coverages through work. Some plans provide three-in-one protection, so you can get all three types of insurance in one affordable package.
Fine-tune your investment portfolio if appropriate
There are a few reasons you may need to make changes to your investment portfolio before, during or after a career change. If you received a severance package, it’s important to make the most of it, whether you want to invest it for the long term or draw income from it while you decide on your next career move.
You may also need to take a close look at your current asset allocation if you think you may need access to some of your longer-term savings to bridge a gap between jobs, finance retraining or invest in a new business. With your advisor’s guidance, you can decide if you need to reallocate some of your portfolio.
For example, it may make sense to shift a more aggressive, growth-oriented portfolio towards more conservative, income-oriented investments. This reduces the chance that you’ll have to sell at a loss, because more conservative investments tend to experience fewer ups and downs. However, keep in mind that changing your asset allocation can affect your portfolio’s ability to meet your long-term growth needs – and that’s something you’ll want to discuss with your advisor too.
Adjust your retirement plan if necessary
A career change can have a positive or negative effect on your retirement plan. Over the long term, your new direction may open the door to higher earnings and allow you to save more, invest more and have more to spend in retirement. If you love your new job, you may also choose to delay retirement, giving you extra years to accumulate a bigger nest egg.
But there are risks too. If your portfolio is positioned more conservatively, it will tend to grow more slowly and that may leave you with a shortfall at retirement. In addition, when you change careers, you may stop getting employer contributions to a pension plan or group RRSP – which can affect your retirement income. If your income drops temporarily or longer term and you’re not able to contribute as much as you usually do to your own retirement savings, that can compound the problem.
Your advisor can help you run the numbers, see the impact of different scenarios on your retirement plan and make adjustments when appropriate.
Keep your advisor informed
As you chart your new course, weighing opportunities and deciding on your best path forward, keep your advisor in the loop. He or she can be a valuable resource as you navigate the financial consequences of a career change, helping you reach a future that is both professionally and financially rewarding.
© 2018 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.