Updated on 08.09.17

Planning Ahead for Extended Leave, Financially and Professionally

Introduction

Whether you’re considering a sabbatical or you’ve been forced to take extended leave due to a family or medical emergency, there are considerable challenges to overcome. While it doesn’t do any good to worry and stress about all the details, it also isn’t wise to just shrug your shoulders and assume everything will “work itself out.” In both cases, the best course is to plan ahead. With careful preparation and innovation, that trek through South America isn’t out of reach, and staying home with a new baby for an extra few months won’t lead to financial ruin.

That’s why we wrote this piece – to guide those facing the prospect of extended leave through the process of preparing financially and professionally. The goal is to make it through (and even enjoy) extended leave without returning to a mountain of debt and a career that’s in shambles.

Here’s what we will cover:

coverage

Understanding Extended Leave

What Is a Leave of Absence?

Extended leave is a term that is used to describe a particular type of “leave” which is short for “leave of absence.” The State of Washington defines a leave of absence as a period of time in which you aren’t performing job duties, but “the employer-employee relationship is continued, and you will be reinstated in the same or similar job when the leave expires.”

How Is Extended Leave Unique?

For the purpose of this guide, extended leave differs from regular leave or vacation in that:

how-is-extended-leave-unique

Reasons for Extended Leave

There are lots of different reasons why people might need or desire extended leave, but they can be broken down into three categories.

emergencies

non-flexible-timing

flexible-timing

How to Prepare for Paid and Short-Term Leave

Know the Law

Depending on your unique situation, your employer may or may not be required to grant you a leave of absence. It’s important to know where you stand legally so you can use the correct approach. For instance, if your employer is legally required to grant you leave, you might broach the subject by saying something like, “we both know that you have an obligation to grant me leave for this circumstance, and I want to talk about how we can work together to make sure my critical job duties are taken care of while I’m gone.” If your employer isn’t required to grant you leave, explaining the circumstance and the timeframe involved, and then asking (not demanding) for approval is much more appropriate.

The Family Medical Leave Act (FMLA)

Not every employee is eligible for FMLA leave. To start with, if your company doesn’t have 50 or more employees within 75 miles of your job site, it isn’t required to comply unless it’s a government agency (including public schools). Additionally, you must have worked for your employer for 12 or more months and averaged 24 hours per week during those months to be covered.

Note: Seasonal workers are covered since the 12 months do not have to be consecutive, but you cannot have taken a break in employment for more than seven years. Also, airline flight crew members have special rules.

The maximum amount of time that may be taken under the FMLA in a single 12-month period is 12 weeks (except for Military Family Leave). However, certain situations may allow you to take that time off in smaller chunks, or even work out an arrangement that involves working part-time.

The reasons for taking FMLA leave are limited. Below is a summary of some situations that are covered:

the-reasons-for-taking-fmla-leave-are-limited

State Law

Always research your state laws as some may be more generous than the FMLA. For example, several states require certain types of employers to provide paid leave in specific situations such as the birth of a child.

Research Your Company’s Policies

Depending on your employer and your benefit package, you may be entitled to a certain amount of paid or unpaid leave for certain situations. For example, government agencies tend to have strict rules about when leave will or will not be granted. Some companies may even have a sabbatical program or other programs of which you are not aware.

If you aren’t sure how to find out about your company’s policies, email or ask your supervisor or HR department. Knowing your employer’s policies and history with granting leave will give you leverage (or at least a starting point) when you apply.

Communicate Well

Who to Ask

If your company has an HR department, correspond with a representative to determine what the application process looks like. If you work for a smaller company, you should approach your supervisor or boss directly.

How to Ask

Even if your employer is required to give you a leave of absence, it’s helpful to initiate the conversation with humility and look for common ground. Remember: The idea of an employee leaving, even for several weeks, can be stressful for your supervisor – be sure to take that into account and let him or her know that you will be doing everything in your power to make sure your critical job functions are still accomplished.

Communicate with Co-Workers

While you don’t need to give your fellow employees all the details, you should let them know when you will be leaving and when you expect to be back. If your absence will impact their job functions, be sure to do everything you can to set them up for success.

Utilize Applicable Parts of This Guide

While we won’t go into depth about planning ahead for paid and short-term leave, certain aspects of Parts 1 & 2 (which are written to prepare for extended leave) may also apply to this type of leave. Overall, the amount of planning and preparation that is necessary has a lot to do with the length of time for which you will be gone, and whether you will be drawing pay during that period of time.

Part 1: How to Prepare Financially

Budget

The first step to preparing financially is to make sure you have a clear, accurate budget. That process can be broken down into three major steps that are discussed below.

Determine Your Current Monthly Spending

Before you decide how much you need to save for your leave, determine how much you spend each month right now. If you have a frugal budget that you stick to, then you are set. If not, now is the time to begin. Start by tracking expenses and determining where each dollar is going. It’s also necessary to break down your spending into categories so you can see how much you are spending on food, how much you are spending on gas, etc.

Identify “Problem” Areas

Most people have certain a type of spending that are more difficult than others to control. Common problem areas include eating out, clothes shopping, entertainment spending, etc.

Once you’ve identified those areas, the next step is to consider strategies to reduce your spending. One such strategy is the envelope system which curtails spending by moving to a cash-based budget. The cash is deposited weekly or monthly into envelopes, and once it’s spent, no more can be used that week or month for that type of spending.

Create a Detailed Budget

After you’ve decided how to limit the spending in any problem areas, you can finish your budget. Remember that your total spending in your budget needs to be less than your income. The more you limit your spending, the quicker you can save for you extended leave. Be sure to track your spending (weekly or bi-weekly) to make sure you are on track.

Start Saving Now

While you can’t change the past, you can start saving now. If your leave is for an emergency or situation with inflexible timing, you shouldn’t get discouraged if you don’t have a large amount savings built up. Instead, choose to start saving immediately – even if you have never been successful, there are steps you can take to reach your goals.

Determine How Much You Need to Save

What will your monthly budget look like while you are on leave? Are there expenses like that will increase? For instance, if your employer covered certain benefits (like dental insurance or your life insurance premium), will you be required to pay for those while you are absent? Also, consider if your leave will necessitate more expenses than your lifestyle does. Prescription costs and travel expense are two examples that might apply depending on the reason for your leave.

You should also factor in expenses that will decrease while you are on leave. For example, if you are travelling the world, your day to day living expenses might be less in third world countries than in the U.S. If you are staying home with a newborn, will you have the time to buy in bulk and cook at home, or will you be able to save on childcare costs for your other children?

Another piece to consider is whether you can make a small income while on leave. Here are a few ways you might be able to make some extra cash:

  • Babysitting
  • Driving for a ride-share company
  • Teaching English while overseas
  • Renting out your house while away for an extended excursion

Not only do you need to determine your monthly spending and potential income while on leave, but you also need to factor in the necessity of an emergency fund. If you are cutting unnecessary expenses from your budget to facilitate your leave, you won’t have the wiggle room that you did before you tightened up your budget. If you don’t have an emergency fund, unexpected bills or expenses could ruin your plans or lead to severe financial hardship.

Consider Ways to Increase Your Ability to Save

The most straightforward way to create savings is to lower your monthly expenses. Here are a few ideas:

  • Pay Off Debt: If your extended leave is a voluntary decision, it’s wise to prioritize paying off debt before your leave. Of course, a car or house might be a longer term debt that isn’t realistic to pay off quickly, but eliminating credit card debt will free up a surprising amount of your budget.
  • Trim the Fat from Your Budget: Try frugal strategies like taking a lunch to work instead of eating out, making coffee at home instead of stopping by the coffee shop everyday, and evaluating every purchase on the basis of whether you actually “need” the goods or services (or if you just “want” them).
  • Give up Recurring Expenses: Consider working out at home or opting for Netflix instead of cable. The more recurring expenses you take out of your monthly budget, the more savings potential you develop.
  • Make Drastic Changes: If the situation requires to save up a significant amount quickly, you might have to consider some serious lifestyle changes. For example, you might need to sell your newer SUV and buy an older commuter car or get a roommate.
  • Find Ways to Earn Extra Income: Selling items you don’t use is a good place to start. You could also work a side job on nights or weekends. If you live in a large city, using your newer vehicle to drive for a ridesharing service can turn your liability (car payment) into an asset.

Adopt a Savings Strategy

A couple of good ways to save include setting up automatic transfers to a separate savings account (don’t touch that account until your leave), or using a savings jar. Seeing your money grow in front of your eyes can be a great motivation to save.

The Snowflake Method is another popular strategy. Whenever you don’t spend money that you budgeted for an expense, transfer it into savings or put it in the jar. The idea is that multiple tiny additions add up to a large amount and build momentum towards your savings goal. For example, whenever you skip the morning latte and opt for a home-brewed cup, you can deposit $4.50 into your savings account. The key is to take money that you budgeted for expenses and put it into savings on a daily or weekly basis.

Part 2: How to Prepare Professionally

How to Apply for Extended Leave

Depending on the size and structure of your company, who to talk to and how you approach the conversation may be different.

If Your Company Has a Human Resources (HR) Department

Start by requesting information about the company’s policies regarding extended leave (Step #1 below), and find out how specific aspects of pay and benefits would be handled (Step #5 below). Determine who to submit your request to, just be sure to follow Step #3 (speaking to your supervisor), before you go over his or her head to apply for leave.

When you correspond with HR, be vague about your reason to request information. It would be wise to hold off on informing them that you are planning on applying for leave. For instance, you could write an email that says something like, “I would like to know if the company has any policies or history regarding taking a leave of absence outside of what is legally required.” If prompted for more information, you can respectfully decline by saying, “I’m not ready to discuss personal matters at this time. I’m simply interested in knowing what the company’s policies are concerning a leave of absence.” Additionally, ask any specific questions regarding paid or unpaid leave that you may have.

If Your Company Doesn’t Have an HR Department

Ask your supervisor or manager who you should speak with to find out about the company’s procedures regarding leave. Depending on the structure of your company, the owner or hiring manager might be the person to whom you need to direct your request.

Step 1: Investigate Your Company’s Policies

Determine if your company has established policies that relate to the type of leave that you are needing or wanting to take. If your company has policies in place, adhere to those guidelines. If not, determine who you will need to speak with to secure permission to take extended leave. The sooner you know your company’s policies and history with leave-taking, the better you can plan.

Step 2: Consider How You Will Respond If Leave Is Not Granted

If your employer outright refuses your requested leave, how will you respond? If you are willing to resign, or you have no other option but to take the leave (if it’s a medical emergency that’s not covered by FMLA, for example), do your best to make your transition as smooth as possible, and discuss the possibility of rehire in the future.

If you aren’t willing to resign, consider your response should your employer refuse. You should be ready to suggest alternate plans, including:

  • Delaying Your Extended Leave: Are you willing to put off your leave to a time that would be more beneficial to your employer? For example, if you are planning a sabbatical, delaying by an additional six months may allow your manager to train someone to cover your job responsibilities while you are gone.
  • Working Part-Time: If you’re taking leave to deal with a family emergency that’s not covered by FMLA, you may be able to handle your family responsibilities while working part-time at your job for a period of time.
  • Working Remotely: If you are planning on staying home with an infant past the allotted time frame or traveling out of the country, can you still perform limited job functions from a laptop and use video calling to attend meetings?

Step 3: Speak to Your Supervisor

If the appropriate person to request leave from is not your immediate supervisor, consider giving him or her a “heads up” before you apply. Give a brief snapshot of your reason for the request and the potential timing – this will prevent your supervisor from being blindsided by an email from HR and will ensure that he or she isn’t misinformed about the circumstances surrounding your leave.

Step 4: Apply for Leave

After determining the correct procedures (or who to speak to if there aren’t any) be sure to start the application process as soon as you decide to take the leave.

There are two schools of thought regarding how employees should approach this conversation. The first is to have a face to face meeting where you outline your reasons for taking the leave, and what you are willing to do to make the transition as smooth as possible. This is followed up by an email outlining the reasons and formally requesting the leave.

The second approach involves first sending an email outlining your reasons for leave, what you would be willing to do to ease the transition, and when you would potentially return, and then having a conversation. This tactic gives your supervisor or HR representative time to process your request. Your in-person meeting can then focus on the specifics of your potential leave and strategies for ensuring that your job functions would be handled while you are away.

Regardless of which option you choose, be sure your conversations and correspondence have these characteristics:

  • Well Timed: Be strategic by scheduling the meeting at a time when your boss won’t be overly stressed. For instance, if your supervisor or manager has an important end-of-month deadline coming up, consider working to help achieve the goal, and then schedule the meeting at the beginning of the following month. Also be sure to indicate how long the meeting could take. For example, don’t ask for a quick 15-minute meeting before lunch – communicate that you need a more realistic amount of time to discuss an important matter.
  • Respectful: Always start by asking (rather than telling) – give your employer the chance to freely grant leave before discussing what recourse you will take should your request be denied.
  • Thought-Out: It’s not optimal to approach your employer and say something like “I kinda think that I want to take leave at some point in the future, but I’m not totally sure. How do you feel about that?” Be ready to clearly explain why you want leave, when you want it to start, and when you plan on returning to work.
  • Transparent: Your employer will appreciate knowing why you need to take leave. Be honest about your reasons and don’t try too hard convince your employer that it’s necessary. That can come off sounding insincere. That being said, you also should be careful not to share too much either. Your employer doesn’t need to hear the whole story about your messy divorce, or why you feel so burnt out. Give an overview of the situation and only include pertinent details.
  • Positive: Be sure to mention the benefits of taking an extended leave. While there might be less-than-optimal circumstances behind your request, there’s always at least one or two positives that you can highlight. For instance, If you want to take a sabbatical, you can explain that there are benefits to both you and the company. When you return you will be refreshed and refocused, which will help both your productivity and the way you interact with those around you. If you need to take extended leave to rehabilitate from a substance addiction (and you or your employer isn’t covered by the FMLA), you can speak to the increased level of productivity you will have when not struggling with addiction on a daily basis.
  • Accommodating: Consider the ramifications of taking the leave you are requesting – who will fill in for you? What critical job functions will need to be handled by someone else during your absence? Let your employer know that you are willing to work with them to make sure your absence isn’t detrimental to the company. Suggest a couple strategies for dealing with any obstacles, but also ask for his or her input as to how you can prepare your co-workers and managers for your absence.

Step 5: Discuss the Specifics

While this might require a separate conversation, be sure to get answers to any questions you have as far in advance as possible. Also be sure to confirm the details (like when your leave will start and end) with your management.

Some questions to ask might include:

  • Who should you periodically check-in with to update your timeframe for return?
  • If you have equity, will it continue to vest while you are on leave?
  • How will your benefits be handled (such as health insurance, life insurance, etc.)?

Getting Ready for Leave

Document Your Work

Create to-do lists, manuals, and whatever else is necessary to carry on your work in your absence. If you plan on being available should your replacement have any questions, make sure to set up boundaries for how and when that should happen. For instance, you might notate something like, “Feel free to call between 10 and noon if you have urgent questions. If the matter isn’t urgent, send an email instead.”

Communicate with Your Co-Workers

Be sure to tell your fellow employees what you want them to know about why you are taking leave. If you don’t shape the narrative, they will assume motivations and reasons that may not be accurate. Also, inform them of the status of any critical projects, and be sure to discuss what you can and will do to minimize the impact of your absence.

Inform Affected Customers

Let your customers know the general timeframe of your leave, and who they can contact while you are away. Set up automatic voice and email responses that direct customers to the person they can contact.

Don’t Burn Bridges

One of the most important pieces to successfully navigating extended leave is to make sure you don’t burn any bridges. Do your best to leave on a positive note, and if there’s any relational tension, be sure to resolve that as much as possible before you leave.

While on Leave

Since it can be difficult to walk away from unfinished projects, you may have to resist the temptation to stay involved with work. Unless you’ve specifically indicated that you will finish up certain tasks or projects while on leave, stay as hands-off as possible.

What you can and should do, is maintain and develop relationships with your co-workers. If you are going to be travelling, you can document your journey and interact with fellow employees via social media. Getting coffee or drinks with a few co-workers every once-in-a-while can really help to ease your transition back to work when the time comes.

Additionally, keep your employer informed of your timeline for return. Let them know that you are serious about returning (if you are). If your return date changes, be sure to inform your contact as soon as possible. If you decide not to return, be direct with your employer and explain your reasoning as soon as possible. This will increase your chances of being rehired in the future, or at least the potential of receiving a positive reference down the road.

Return Well

Don’t assume everything will be the same as when you left. Approach your first day back from leave in the same way you would approach the first day at a new job. Don’t come back and immediately start throwing your weight around. It’s important to communicate your appreciation to those who filled in for you while you were gone. Keep in mind that you may have to navigate some resentment at first. For instance, co-workers might say something like, “While you were off traveling the world, we were stuck here filling in for you.”

Take Action

While the idea of taking extended leave can sound daunting at first, developing a solid plan of action can put it within reach. Whether it’s your choice, or it’s forced upon you, plan ahead, and the obstacles can be overcome. Start preparing now. After all, the sooner you begin, the more prepared you will be for your extended leave.

Planning for the Military-to-Civilian Transition

While most everything discussed above can be helpful when separating from the military and transitioning to a civilian job, members of the armed forces face unique challenges that can be overcome with proper preparation.

If you don’t prepare adequately you may face some of the following consequences:

  • Delayed Retirement: Failing to prepare may require you to cash in your Thrift Savings Plan (TSP) which can cripple your retirement plans for the future. You will typically pay a 10% penalty on top of any income tax that’s assessed.
  • Suboptimal Job: If you aren’t properly prepared, you may have to cut your job search short and take a job in a line of work that you don’t prefer, or one that doesn’t offer competitive compensation.
  • Drastic Lifestyle Changes: The third possible consequence is having to make significant lifestyle changes, such as selling your vehicles or living in a cramped apartment in a poor part of town.

On the other hand, if you plan ahead you can set yourself for success. That means you will have a much better chance of maintaining a reasonable lifestyle while you find the job that’s right for you – all without compromising any retirement savings you have built up.

Financial Planning

Budgeting

The first step to plan for your upcoming transition is to build a civilian budget. Keep in mind that there are expenses you may not think about right now that should be included. Housing may be the biggest adjustment – if you aren’t used to paying rent or a mortgage payment, costs may have increased more than you may think. Be sure to research the cost of housing where you will be living and include that in your civilian budget.

While you may be eligible for free healthcare for up to 180 days as part of the Transitional Assistance Management Program, keep in mind that you may have to start paying for health insurance at some point in the future.

Transition Plan

Once you have a general picture of your monthly costs for the next 6 to 12 months, you need to ensure that you have enough savings to cover your living expenses while you search for a job or go to school. Keep in mind that the average job search takes about 43 days, so make sure your fund will provide for you for at least two months.

If you aren’t able to find a job, you may also be able to supplement your transition fund with unemployment coverage if you were discharged honorably. Visit your home state’s employment website for more information.

If you aren’t planning on transitioning directly to the civilian work force after separation, your transition plan will need to include the time it takes to further your education and the time it will take to find a job afterward. Be sure to include whatever loans or benefits you will be using to support yourself while you further your education.

Retirement Fund

The last aspect of financial planning has to do with your retirement fund. If you didn’t contribute to a TSP, then your planning is much more straightforward: start saving as soon as possible. For the majority who did contribute to a TSP, you have to decide what you will do with those funds. Below is an overview of your options, but be sure to speak to a registered financial advisor for expert advice.

Here are your basic options:

  • Do Nothing: If you don’t do anything, your funds will stay right where they are and will continue to grow until you are ready to retire. The benefit of this approach is that the TSP tends to have comparatively low expense ratios – which means that more of your money stays in your retirement account. The downsides to the TSP are that you can’t contribute more money (you will have to navigate two separate retirement accounts), and you have less control over the investment strategy.
  • Roll It Over: If you desire the simplicity of having one account, or you want more control over how your funds are invested, you will need to roll your funds over into a new account. The choices are many, but generally, if your employer offers a matching 401k program, that may be the best choice. If not, an IRA (pre-tax contributions) or Roth IRA (post-tax contributions) may be best. If you do choose an IRA, move traditional TSP funds into a traditional IRA and Roth TSP funds into a Roth IRA.
  • Cash It Out: As noted earlier, this is the least desirable option, since it usually means that you will be subjected to a 10% penalty if you aren’t at retirement age yet.

Note: The portion of your funds that was contributed from non-taxable pay earned while in a combat zone is kept separate from your other funds (you can see your balance by logging on to your account). If you have any contributions of this type, it may be wise to keep them in your TSP account, rather than grouping them with your other funds if you choose the “roll over” option. This will help to ensure that those funds maintain their “tax-free” status when you withdraw them upon retirement.

Professional Planning: Directly Entering the Workforce

Building a Resume

Your first step when planning for your new career will be to create a resume. As a veteran of the armed forces, you acquired many skills that are very valuable to potential employers – it’s your resume’s job to present those skills effectively. Many civilians who have not served in the armed forces may not understand the context or terminology used by members of the armed forces, so some interpretation and creative communication may be required.

Here are a few tips for writing a resume:

  • Clarity: Be clear and use common terms not military jargon. Think about how you would explain something to a friend or family member that’s never served.
  • Creative: Include skills and traits that will be useful for your employer. For instance, “I know how to fix a tank” won’t be useful unless you are applying for a mechanic. However, “I learned how to problem solve and turn written directions into real results” is very useful in many professions.
  • No Assumptions: Don’t assume that potential employers will understand the basics of military life. Include obvious qualities or skills such as learning how to implement orders that don’t make sense, and the quality of always being on-time and dependable.

For more help, use the VA’s resume builder and this skills translator that was designed specifically for veterans.

The Job Search

Once you have a general resume built, the next step is to firm up a career path and start applying for a job. Even if your separation date isn’t for a few more months, it’s wise to start as far in advance as possible – once you know your general occupation and where you will be living, you can start your search.

This will help accomplish several things:

  • It will make the transition period between your military career and your civilian career as short as possible (which can save quite a bit of money)
  • You can further narrow-down your career choice as you observe job-availability and requirements
  • You will get a general feel of the job-market in the area, which will help you know if the job and compensation package you are considering is above average or subpar

As a veteran of the armed forces, there are many resources designed especially for you (in addition to all the other resources out there). For instance, you can get a personal career counselor, use a job finder designed for veterans, or get assistance with necessary certifications or courses. The full catalog of resources is available on the Department of Labor’s website.

Note: Keep in mind during your job search that salary and benefits are negotiable, and just because a salary is considerably higher than your current take-home pay, doesn’t mean it’s equivalent. Refer to your civilian budget that you created (as explained above) to compare salaries, rather than comparing them to what you currently make. Also, remember that your benefits package is extremely valuable and should be negotiated as well.

Professional Planning: Furthering Your Education

If you are considering the idea of furthering your education, whether that means a trade school, community college, or public university, you should know that the Post-9/11 GI Bill may pay for all or some of your education and living expenses during that process. To firm up your plans, you should have a good grasp of your options – an overview is listed below.

Eligibility

The first factor to consider is whether you are eligible for the full benefit or not. If you haven’t been serving for the required amount of time, your benefit will be prorated, and you must have been honorably discharged to be eligible.

If certain conditions are met, some or all of the GI Bill benefits may be transferred to the spouse or children of an eligible servicemember. You can visit the VA’s website for more details.

College and Degree-Granting Programs

If you want to pursue some type of degree, some or all of your tuition and fees may be paid for you – it depends on whether you go to a public college as an “in-state student” or if you choose a private college, distance learning, or “non-college degree-granting program.” For in-state students, you are eligible to have the full tuition and fees covered at a public college, but for everyone else, $22,805.34 is the maximum per academic year that you can be awarded.

The Post-9/11 GI Bill also includes a stipend for books and supplies and a housing allowance. The stipend for books and supplies is $1,000 yearly, but’s it’s a proportion of your enrollment – so if you aren’t enrolled as a full-time student, you won’t receive the full benefit.

The housing allowance is usually equal to the current Basic Allowance for Housing (BAH) for an E-5 with dependents. You can use your school’s zip code and this tool to find out the current rates. If you are attending a foreign school, the current housing allowance rate is $1,681, and if your college is exclusively online, the rate is $840.50. Keep in mind that if you are on active duty or enrolled half-time or less, you won’t qualify for a monthly housing allowance.

Non-Degree Education Options

There are a handful of other ways to use your GI Bill benefits – a summary is listed below:

  • Apprenticeship and On-the-Job Training: This benefit is a percentage of your applicable housing allowance (as discussed directly above). For the first six months of your training, you are eligible for 100% of your housing allowance, for the second six months, it goes down to 80%, and so on until you reach 20% (which is available for the rest of your training regardless of the length of time).
  • Vocational Flight Schools: You are limited to a total of about $13,000 per academic year for this type of schooling.
  • Correspondence Schools: For correspondence schooling, your total benefit may not exceed about $11,000 per academic year.
  • National Testing Programs/Licensing & Certification Tests: You may be reimbursed up to $2,000 per test or program.

Planning for Retirement

Long-Term Planning

There are many different schools of thought when it comes to saving for retirement, but the one thing that’s consistent is that you should start saving as soon as possible. If you haven’t started saving yet or haven’t researched your options, here’s a brief guide to getting started.

  • Priority #1: Maximize Employer Matching If you are fortunate enough to work for an employer that matches a certain percentage of contributions to a 401(k), your first priority should always be to double your contributions by investing the full percentage of your pay that will be matched.
  • Priority #2: Maximize IRA Contributions If you’ve maximized your employer’s matching funds or your employer doesn’t match contributions, the next priority should be to invest in an IRA. IRAs have the same tax benefit as 401(k)s (you don’t have to pay taxes on the growth of the funds), but IRAs offer more flexibility and choice.

    To start with, IRAs are managed by numerous different companies, which allows you to choose one with the lowest investing fees. 401(k)s are provided by your employer, so your options are limited. Another advantage of IRAs is that you can choose to contribute before tax dollars or after tax dollars, while a 401(k) is only exclusively limited to before tax dollars.

    For more on the differences between a 401(k) and an IRA, read our guide on the subject.

    A traditional IRA allows you to deduct contributions from your taxable income, but you will be taxed on your contributions when you withdraw them. Contributions made to a Roth IRA will be taxed now, but you won’t have to pay any taxes later. The maximum contributions you can make to an IRA (either type or both) in 2017 is $5,500 (or $6,500 if you are over 50).

    For more information on IRAs (including eligibility based on income limitations), read our guide on “Roth IRA vs. Traditional IRA: Retirement Showdown.”

  • Priority #3: Contribute to a 401(k) (Non-Matched Funds) After maximizing any employer matching and investing the maximum allowable in an IRA, your next priority should be your employer’s 401(k) above and beyond any matching funds. 401(k)s are generally a better choice than other investment options (other than IRAs) since you aren’t taxed on the growth of your contributions.

Short-Term Planning

When you start getting close to retirement age (within 10 years or so), there are some decisions and plans that need to be made.

Decide When You Will Retire

For most people, the age at which you choose to retire is a very important decision that can have a huge impact on the yearly income you can expect to receive. The basic rule of thumb for most people is that the longer you wait until you retire, the better. Of course, you also have to consider the fact that the older you get, the more your health may deteriorate, which may mean you won’t be able to enjoy your retirement plans as much as you would have should you have retired a little earlier.

When making a decision about when to retire, consider the following:

  • Social Security Reduction: If you retire early, your monthly stipend will be reduced by a small fraction for each month before your retirement age as determined by the Social Security Administration (SSA). Your retirement age depends on when you were born – to find out what your retirement age is, and what type of reduction you could face, head to the SSA’s website.
  • Retirement Fund Usage:Obviously, the sooner you retire, the longer you will be drawing on your retirement savings. This means that you have to choose between using less each month, or face the possibility that your funds will run out. Another factor to keep in mind is that the longer you work and contribute to your retirement fund, more you invest and the longer it has to grow.
  • Pension Payout Reduction: If you are fortunate enough to work for a company that offers you a pension, your payout could be reduced if you start the benefit early. Check with your company’s pension manager to find out the details.

Transition Your Stocks to Low-Risk Profiles

When you are younger, sudden drops in the market shouldn’t concern you, since the market will have plenty of time to recover. The more aggressive your investment approach, the more ups and downs you can expect. However, when you are about 10 years out from your retirement date, it’s wise to start transitioning your high-risk funds to more low-risk funds. If you don’t, a sudden downturn in the economy could delay your retirement by years while you wait for it to recover.

The bottom line is that your priority shifts from growing your portfolio to preserving your portfolio. While there are different ideas about how and when to do this, the key is to make it a gradual transition. Many investment managers (be it a real person or a company that offers automated investing) target a specific date and handle the reallocation of stocks to bonds as your retirement age approaches.

Start Making a Plan for Your Health Insurance

Health insurance is a pain no matter what age you are, but when you get ready for retirement, it starts getting a whole lot more complicated (and expensive). As you approach the age of 65 (regardless of whether you plan on waiting to retire for a few more years), you need to make a plan for how you will handle health insurance.

If you plan on enrolling in Medicare Part B, or anything else beyond Medicare Part A, you should consider enrolling about three months before your 65th birthday. The reason for this is that you will probably have to pay a late enrollment penalty if you wait until after your 65th birthday to enroll. The normal enrollment period extends from three months before your 65th birthday to three months after your 65th birthday.

Here is an overview of the different Medicare plans and a few other options:

  • Medicare Part A:This is the first part of “Original Medicare” and is typically free for those who’ve worked and paid into social security for 40 quarters or more. Medicare Part A covers hospital care, nursing home costs, hospice, and the like.
  • Medicare Part B: Part B covers most “outpatient” procedures, such as doctor visits, lab tests, and medical supplies. You will usually have to pay a monthly premium that’s higher or lower depending on your income.
  • Medicare Part C: Part C is also called a “Medicare Advantage Plan” and is administered by private companies approved by Medicare. It functions a lot more like a typical health insurance plan – there are deductible, co-pays, and out-of-pocket maximums. This type of plan typically covers everything that Part A, Part B, and Part D covers. Premium costs and coverages vary between providers.
  • Medicare Part D: Also called “Medicare Prescription Drug Plan,” Part D supplements Original Medicare and a few other plans by adding prescription drug coverage. The cost for Part D varies based on the drugs you use and the plan you choose.
  • Medigap: This type of coverage is sold by private companies and covers the costs that Medicare doesn’t, such as copayments and deductibles. Keep in mind that it doesn’t cover everything, and you must have Medicare Parts A and B to be eligible.
  • Health Savings Account (HSA): An HSA is a tax-advantaged way to save up for medical costs. To be eligible, you must have a high-deductible health insurance plan. The main benefit to this type of account is that contributions are deducted from your taxable income, the funds grow tax-free, and they aren’t subject to taxes when withdrawn to be used for qualifying medical expenses.
  • Medicaid: Medicaid covers health care costs for those with a limited income, and can be used to help pay for what Medicare doesn’t cover if you qualify. To find out if you are eligible, check with your local state’s Medicaid department.

About this resource:

Created on: December 02, 2016

Updated on: August 09, 2017