According to the Bureau of Labor Statistics, the average worker will have 12 different jobs between the ages of 18 and 52. Workers will also endure an average of nearly six periods of unemployment during those years.

There are infinite resources on how to get a job and how to keep one. But there isn’t nearly as much advice on how to leave a job, whether voluntary or involuntary.

Whatever your reasons are for leaving a job, there will likely be a financial impact. Hopefully, it’s a positive one (i.e. more money). But there can also be negative consequences.

Here are ideas on how to leave a job without hurting your personal finances.

When possible, leave on your own terms

Workers can’t always anticipate job loss. But often there are signs that you may be let go. Maybe the company is struggling and announcing layoffs in other divisions. New leadership often leads to personnel changes further down the organization. Perhaps your manager has become distant or not including you in key projects.

If you start to get the sense your current job is at risk of being eliminated, it’s best to start looking now. Don’t wait until the hammer drops before you begin a search for new employment.

It’s almost always best to have a new job before you leave one. Looking for a job while you still have one gives you more leverage. You can negotiate for a higher salary at your current employer or from the company offering your next job. Seeking employment when you still have a job is like having a safety net.

On the other hand, when you’re unemployed and the bills start piling up, you’re often forced to accept the first offer that comes along. It often leads to accepting a decrease in your salary and benefits package.

Most career experts also discourage leaving voluntarily without a new job lined up first. It’s easy to underestimate how long you’ll stay unemployed before the right job comes along. You can also overestimate how long you’re able to keep your finances healthy without a steady income. Any gaps in employment history can raise red flags with recruiters and hiring managers.

Do what you can to remain in your current job, no matter how much you want to leave, until you have received a new offer for employment.

Prepare for the possibility of a layoff

Whether you love your job, hate it, have stable job security, or sense the end is near, you should always have an emergency fund. A job loss can happen at any time — many who had few worries earlier this year are now dealing with COVID-19 fallout. And life’s needs and bills don’t stop just because your income does.

Make sure you have an adequate emergency fund in the event you can’t work. Financial experts suggest your emergency fund should hold an amount equivalent to at least three months of take-home pay. Another rule of thumb is to have enough to cover essential expenses for three to six months in the event you have no income.

This is also a good time to buy an individual disability insurance policy if you don’t already have one. If your only coverage is a group policy through your current employer, you will lose it if you lose your job. And there’s no guarantee your new employer will offer a group plan.

In addition:

  • Regularly review your budget to find ways to eliminate or reduce expenses.
  • When possible, pay more than the minimum amount due on debt payments to eliminate debts sooner. It also helps to reduce your expenses during employment because you can then lower your debt payments to the minimum level until you’re working again.
  • Look for ways to reduce the interest on credit cards, student loans, and other debt.
  • Keep your credit score as healthy as possible so you can pay the lowest interest rates on debt.
  • Know which debts or regular payments, if any, have the ability to defer payments during periods of unemployment.

Consider your entire compensation package, not just your salary

If you’re leaving a job on your terms, chances are you have another one lined up. You may have taken the new job because it pays more.

Keeping your new job from negatively affecting your personal finances means comparing more than just salary. If you’re interviewing for a new job, you want to add up all of your salary and benefits to compare with what a new prospective employer is offering.

Besides salary, the biggest comparison you will probably need to make is the cost and benefits of your health insurance plan. This includes:

  • How much in premium will be deducted from your paycheck to cover your health insurance?
  • What is the annual deductible on your new plan versus your current one?
  • How much are co-pays for standard procedures and clinic visits?
  • What percentage of treatment costs will the plan cover once deductibles are met?
  • How much will your current prescriptions cost in your new plan versus your current one?

Compare other compensation beyond regular salary. These include matching funds to your 401(k), profit-sharing, and performance bonuses.

Also add up the value of other benefits, such as discounts available to employees like mobile plans, gym memberships, and travel services.

Factor in how much your new job costs

It’s not something you always think about, but it does typically cost you money to have a job.

For example, how long is your new commute? If it’s considerably longer than your current one, how much more will it cost you in gasoline and vehicle maintenance? Will you have to pay for parking each day?

If you’re moving to another city or part of the country, you should also compare the costs of living between your current home and your new one. In some cases, your new, larger salary may actually give you a lower standard of living because the higher cost of living exceeds your current one.

Some employers may offer paid relocation to new hires depending on how far the job requires them to move. This is another aspect you will want to consider when evaluating your compensation package.

Avoid withdrawing money from your 401(k)

Many people who lose their job decide to tap into their 401(k) plans in order to make ends meet until they get another job. Some even go as far as to cash out their entire plan balance. If at all possible, this should be avoided.

The biggest reason is you won’t receive all the money in your retirement account if you’re under the age of 59.5. Because 401(k)s are qualified retirement plans, there is an early withdrawal penalty of 10 percent on funds you withdraw before age 59 1/2. That means if you take out $10,000 from your plan, the IRS will automatically take $1,000.

(At the time this is being written, Congress was debating whether to suspend this rule due to the high rate of unemployment expected during the coronavirus pandemic).

In addition to the tax penalty, you will also pay your regular income tax on the total amount withdrawn.

If it’s close to the end of the year and you need part of your 401(k) for living expenses, try to at least wait until the following tax year before making the withdrawal. If you were employed most of the year, then withdrew a substantial amount from your 401(k) before the end of the year, you’ll pay more in income taxes because your overall income for the year will be considered. On the other hand, if you wait until after the first of the year and stay unemployed for a significant period, the income taxes assessed on the 401(k) withdrawal will be much less.

For example, say you earned $80,000 in taxable income from your job through December 1, when you lost your job. If you remove $20,000 from your 401(k) to get by, you’ll be paying income taxes on $100,000.

But if you wait a month, then you pay taxes on just the $80,000 for this tax year. Then you’ll pay taxes on the $20,000 withdrawal from your 401(k) in the following tax year, plus whatever you earn once you’re employed again.

Besides the tax implications, removing money from your 401(k) plan also puts you years behind on your retirement saving needs. Once you’re employed again, you will have to contribute more funds to catch up, or risk falling short on your retirement savings when you need them.


Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

Work-Life
Published March 27, 2020