Are you considering taking a break in your career? If so, you’re not alone. Many American workers choose to take time off for a variety of reasons. They may decide to stay home and raise children while their spouse works. Or they may need to provide care for a parent or other loved one suffering from medical issues. Some decide to take time off to further their education and learn new skills.
A wide range of factors should play into your decision. However, one that you may want to consider is how the break will impact your retirement plans. Obviously, a temporary break in your career will mean a loss of earnings during those years, but it can also lead to other long-term financial consequences.
Below are three of the biggest ways in which a career break could impact your retirement. While you are no doubt considering a number of different factors, be sure to include retirement planning in your decision-making.
Reduced employer contributions to retirement plans.
Many employers offer a number of different retirement plans, such as 401(k) plans, profit-sharing plans and even pensions, also known as defined benefit plans. It’s common for employers to make contributions to these plans to supplement your own saving efforts.
For example, an employer may match up to the first 3 percent of employee contributions to a 401(k) plan, essentially giving employees the opportunity to double their savings rate. If you take a career break, you’ll lose the opportunity to save in the plan and the potential to earn employer contributions.
Also, consider that in many plans, the balance grows tax-deferred. If you miss out on these contributions, you’ll also miss out on future tax-deferred accumulation on the contributions. That could add up to a significant amount of lost savings.
Loss of earning years for Social Security benefit calculations.
When the Social Security Administration calculates your retirement benefit, it is largely based on your earnings history. Specifically, Social Security uses your highest 35 years of earnings to calculate a sophisticated average monthly earnings figure. For example, if you retire and file for Social Security benefits at age 66, Social Security will pick the 35 highest-earning years from your career to develop an average.
However, if you take a career break, you may lose out on higher-earning years that would factor into that equation. Social Security may then replace those years with lower-earning years that otherwise wouldn’t be included.
Also, if your break is long enough, it’s possible that you could have fewer than 35 years of your career in which you have earnings. In that case, Social Security will simply fill the remaining years with zeros in the calculation, thereby reducing the average. That reduces your potential benefit.
Altered career path.
Finally, perhaps one of the biggest considerations in a career break is the opportunity cost of taking time off. During those lost years, you may miss out on potential raises, promotions or other opportunities that could increase your earnings and your saving capabilities.
Consider what your career may be like when you re-enter the workforce. Will you re-enter at your old position? Will you have missed out on industry developments and important learning opportunities? Will you have to restart at the ground floor of your industry? Those are important questions to consider as you analyze your potential break.
Granted, there are many factors that go into a decision to leave the workforce. Family or personal considerations may be more important than retirement concerns. However, it’s important to at least include these factors in your analysis.
Unsure of how your career options could impact your retirement? Let’s talk about it. Contact us at Bridgeriver Advisors for more information. We can help you analyze your goals and needs, and then develop a strategy. Let’s connect soon and start the conversation.
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