7 Financial Considerations Before Taking a Sabbatical

The right preparations will set you up for success.

There’s a never-ending list of concerns—both exciting and terrifying—to consider when the prospect of taking a sabbatical is on the table. How will you spend your time? Will you travel? Where will you go? What are you hoping to get out of taking a break from the workforce? Will future employers look disapprovingly at that gap on your resume?

And there are no shortage of financial concerns amongst that laundry list: How will you handle the lack of income? What will you do about your student loans and car payments? How can you ensure that you will be able to afford the basics without that paycheck coming in every 2 weeks? Should you get a credit card? What if you have a hard time breaking back into the job market, or can’t do so at the same salary level you once had?

“A sabbatical typically lasts one year, and although your employer may guarantee you a job upon your return, you may not necessarily be guaranteed the same job function. Before you take this step, you should check your financial readiness,” said Jim Adkins, Founder and CEO of Strategic Financial Associates, LLC in Bethesda, MD. “If you will continue to receive a full salary, then this is a non-issue, but if not, then you need to earmark some savings to cover your living expenses.”

In between getting lost in a travel guide of Thailand at Barnes and Noble and drafting up your resignation letter, here are some financial factors that you should also take the time to consider before taking the leap:

7 Things to Think About Ahead of Time

Your Age: Salary Vs. Investment

“‘Just do it while you’re young,’ is a typical argument, but it’s very dangerous for the sake of career development or investment,” said Trevor Ewen, personal finance and investment writer for Pear of the Week, and contributing personal finance and real-estate investment writer at Bigger Pockets. “There is a similarly strong argument to ‘Do it when you’re older’ and potentially sick of the workforce. It’s most important to choose the option that fits your personality, and not buy into conventional wisdom, as everyone is different.”

At the end of the day, there are pros and cons to each: “Cost-of-living expenses and missed salary/wages tend to get worse with age. You have more expenses (family) and tend to earn more money,” said Ewen. “However, missed investment is more of an issue when you’re young. Compound interest and basic principles of buy-and-hold investing assert that $1 invested today is much better than $1 invested tomorrow. When taking a sabbatical you are drawing not only on past earnings, but you are also robbing your portfolio of past and eventually present contributions.”

He provides an example of a thirty-year-old who has invested $500 per month. “This thirty-year-old takes a three-month sabbatical and stops contributing to their 401k, IRA, or portfolio. $1500 lost contributions does not seem bad. [But] at 8 percent growth over the thirty-five year time period (assuming a retirement age of 65) that money would have become: $22,178.02.”

Save Ahead of Time

“In the best case, you began planning and saving for this sabbatical 1 to 3 years before it actually occurs,” said Ewen. “Save enough money for the trip, assuming you’re not working at the time. This is a must. It’s very dangerous to take a sabbatical and not know how to pay for it. That usually results in credit card debt and a crushing return to the workforce. All just to service high-interest debt.”

Ted Jenkin, Certified Financial Planner and Co-CEO and Founder of oXYGen Financial, Inc., recommended saving one year of your salary in cash. “If you are going to take a sabbatical, you’ll need money to cover the sabbatical plus re-entry time to get back into the workforce,” he said.

Be Smart About Travel Plans

“For long trips, strongly consider the cost of the location. Locations in the developing world can massively help manage the costs. Western Europe, on the other hand, will require a huge travel reserve,” said Ewen. “It’s more challenging, but people should attempt to save even more than the cost of a trip before traveling (150 percent is a good target). In this way, you don’t return at $0 savings. With discipline, you can ‘pay yourself first’ and ensure that your prior hard work and thrift can afford to pay at least half of your salary during your sabbatical.”

Consider Your Benefits (or Lack Thereof)

“Keep in mind that your health benefits might be reduced, so look at different health insurance options,” said Adkins. “This goes for all of your employer provided insurance, including life insurance and disability.”

Be sure to look into the fine print of options like COBRA as well. “It is not always true that you can use COBRA and keep insurance for 18 months,” said Jenkin. “Depending on what type of sabbatical you take, having proper health insurance coverage is important.” You know, for those adventurous types who plan on scaling mountains, hiking through rainforests and backpacking through Europe, the cushion of health insurance will provide much-needed peace of mind.

Update Your Life Insurance and Will

“Update your life insurance before you take the sabbatical. It may be tougher to qualify for coverages such as life and disability insurance when you have no income, plus depending on the sabbatical activities you take, the level of traveling or activities may get you rated by an insurance company,” said Jenkins. “Update your wills, especially if your sabbatical, like one of my clients, was to climb Mount Everest.”

Look For Alternate Sources of Income

Just because you’re leaving your full-time job doesn’t mean that you can’t be bringing in a paycheck at all. “Take a look at how you can generate some passive income–possibly by selling off some of your belongings that you won’t need while you’re traveling,” said Adkins. “If you plan on traveling extensively, perhaps you can rent out your place and store some belongings in storage or at a friend’s house.”

Or consider continuing to work in a different, or lesser, capacity. “Working part-time or remotely during a sabbatical is a great way to split the difference. I get bored when I am completely out-of-work, so I would choose an option like this,” said Ewen.

Don’t Pull From Your Retirement

It may be tempting seeing a chunk of money sitting there just asking to be dipped into, but “avoid pulling anything from retirement. It’s a slippery slope,” said Ewen. “Ideally, you’ll want to avoid pulling anything from savings except for savings specifically dedicated to this sabbatical.”

“I would only recommend it as a last resort,” agreed Jenkin. “If the money is pre-tax then you have to pay taxes; If you are under the age of 59 1/2 you have to pay a 10 percent IRS penalty; you lose the power of the compounding effect of the money into retirement account. All good reasons not to pull your money.”

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