The trend of taking time away from your career to have experiences gets me very excited. Exploring that excitement further it is similar in theory by which opposites attract. I am inspired by people who pursue their passions despite my natural tendency to have a long term, more traditional work life and financial plan. Our family trip this summer is a hybrid of work and play as that is what is comfortable for me. For those of you looking at planning an income pause, here are some pointers to navigate that for your family.
Do not, at any point whatsoever, fund your sabbatical with your retirement account if you are below the age of 60. This is not a trade off in your financial life that you should consider. While you may look at the retirement account that you have been building for years and think that it will not make a big deal, it will. You are cutting your final retirement off at the knees. This is irresponsible financial planning because you are trading eventual retirement for short term travel. While you may look at your balance in your retirement account today and think that it will not have an impact on your long term goals, it takes a lot to build up anything in your retirement. The more you add to it, the more you have the opportunity to compound over time. I do not look at the balance of my retirement accounts, I look at them as an eventual balance to provide for my lifestyle. I do not want to sacrifice my retirement for an adventure. To take an income pause, you will have to have a different source of income.
If you are planning on taking a pause in income, the best way to fund that pause is through savings or investments that may fall outside of your retirement accounts. This could come in the form of savings that have been built up for the stop in income. A spontaneous income pause is very difficult to fund. If you do not have the savings built up yet, the only times I could see it working would be a windfall from a severance package or an inheritance that would be able to provide the income you would need for a sabbatical.
Have a destination, in terms of income. What I mean here is that if you are planning a pause in income, make sure you have done everything in your power to secure income on the other side of that pause. It is a lot easier to get a job when you have a job. Make sure you find the eventual source of income, or new job, before you plan on leaving your current source of income or job. Planning for a pause in income could become financially disastrous if that pause in income becomes permanent.
When planning for an income pause, have a plan for what you expect your expenses to be during that pause. I have had clients take an income pause between jobs where their plan was to spend the summer with the kids bonding as well as plan for an extended vacation between jobs. Both of these were amazing experiences for their families and brought them great wealth in terms of depth in their lives. These two scenarios also had very different expense structures during the income pauses. To live your current lifestyle, you likely have the information needed to figure out the effect of a few months without income. You can just take your regularly monthly spending and multiply it. For an adventure during the income pause, this can take a little more planning. When on the road or travelling, your expenses can be a lot more variable and will take a little more attention to detail to forecast properly.
Despite devoting my career to caring for others’ financial lives, I firmly believe that true wealth does not come from money. I encourage you and your family to follow your passions and if an income pause is something you want to pursue, do it. I hope these tips can help you in your pursuit and help you maintain your long term financial goals while pursuing your passion.
Matt Logan Inc. is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.