Downsizing is one reason you may be seeking a new career. Reaching a professional plateau is another. The fact is, many people change careers, sometimes more than once. With proper planning, you can start a fulfilling new career without sacrificing your financial security.

Decide whether you should start a new career

Once you’ve researched career options available to you, decide whether you should start a new career. First, make sure that you have thoroughly explored ways to make your current career more satisfying. For instance, moving to a different department within your company, taking professional development courses, and/or getting a promotion may change the way you feel about your career. Second, after exploring your interests, you may also discover that changing your career is not the best way to make your life more meaningful. Instead, you may decide to change your life outside of work, volunteer, turn a hobby into a part-time business, or take classes to develop new skills.

On the other hand, you may decide that it’s time to change careers. Perhaps you’re just not happy anymore working in your current field, and there’s no way to fix it. Or, you may be facing early retirement and you see this as an opportunity to move into a new career field. You’ve done your research, and you’re excited about the chance to put your talents and abilities to work in a new career.

Plan for the financial impact of starting a new career

Planning ahead can minimize financial losses

The best way to plan for the financial impact of starting a new career is to plan early. Don’t quit your present job until you’ve determined how you will survive financially during your career transition. In particular, you should undertake the following actions:

  • Determine how changing your career will affect your income and expenses.
  • Save up an emergency cash reserve.
  • Reduce any consumer debt you have by paying off credit cards and loans.
  • Determine whether you can afford to be out of work temporarily in the event that you can’t find a job in your new career field right away or if you go back to school.
  • Figure out how you will pay for your education if you decide to return to school. You may be eligible for grants and financial aid. In addition, if your income is within certain limits, you may be eligible for a Lifetime Learning tax credit each tax year that is equal to 20 percent of your qualified education-related expenses up to $10,000. You may also be able to deduct interest paid on qualified higher education loans.

Changing careers means re-evaluating your insurance coverage

Consider how starting a new career can affect your insurance coverage. For instance, you will likely lose your employer-sponsored health insurance coverage when you resign from your present job. Although you may be able to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for 18 months, it can be expensive to do so. If you have a disability insurance policy, consider the impact that changing your career may have. Your ability to get disability coverage and the premium you pay depend, in part, on your occupation. So, if you switch careers, your disability insurance coverage may be affected.

Changing careers may affect your retirement nest egg

Changing careers may affect your retirement nest egg in several ways. First, if you leave your current job before you have completed a certain number of years of service with the company, you may not be vested in the company’s pension plan. If you are not vested, you will own none of, or only a portion of, the employer’s contributions to the plan. Second, if you leave the company and don’t properly roll over your retirement funds into an IRA or another corporate plan in a timely manner, then you may have to pay a 10 percent nondeductible penalty tax and 20 percent in federal income tax withholding. The funds that are not rolled over will also be included in your income for tax purposes. Finally, you may ultimately lose pension benefits because many plans calculate defined benefits using the employee’s highest earnings years. This means that your pension at age 65 from at least one employer will be based on a salary that you earned years ago when you probably were not in your peak earnings years.

Tip: Sometimes employers use nonqualified deferred compensation plans as golden handcuffs to make sure that key employees stay with the company for a specified period of time. If you are a highly compensated or key employee and participate in such a plan, you may lose certain benefits if you leave the company prematurely under the terms of the plan. Since your monetary loss may be significant, consider this before changing careers.