This article was co-written by Ron Graziano.
Whether planned or unexpected, many of us will likely need to take an extended leave from work at some point in our careers — whether it’s time off to travel, leave to care for a baby or aging parent or to take a mental health break.
The number of workers who are taking sabbaticals or leaves of absence is increasing as many try to avoid burnout or companies are promoting leaves in an effort to reduce turnover.
No matter what your reason, if you want to take a leave from work, you should expect your pay to be reduced while you’re gone.
Here are some tips to help you prepare your finances.
There are essentially two types of leaves of absence: mandatory and voluntary.
For a voluntary absence, like a sabbatical or leave for a family tragedy, reach out to your employer’s human resources department to explore your benefit options and their policies.
For example, your employer may offer bereavement leave or require you to use any accumulated paid leave first before any leave benefits kick in.
The Family and Medical Leave Act (FMLA) entitles certain employees to take unpaid, job-protected leave for specified family and medical reasons, such as serious illness from COVID-19. FMLA ensures the continuation of group health insurance coverage for up to 12 weeks during a 12-month period.
Employees are eligible for leave if they have worked for their employer at least 12 months prior to requesting leave and they have logged at least 1,250 hours in those 12 months.
You should also research whether disability insurance can work with FMLA to replace your income during your leave for medical reasons.
There are two types of disability insurance: Short-term (a few months) and long-term (can cover for multiple years). Long-term disability insurance can typically pay benefits long after your FMLA leave expires. You should first check with your employer, as many offer Long and Short-term policies at low costs.
Next, it’s crucial to be proactive and start planning for your leave as soon as the need arises.
To ensure a smooth transition, you’ll want to give your employer as much notice as possible so your work obligations will be covered while you are away.
Before submitting your leave request, make sure you understand the rules about indicating an end date or general timeframe of your leave so your supervisor can expect when you will return.
If your research shows you can’t afford to take an unpaid leave of absence — or your employer won’t approve one — you may be able to temporarily work from home and negotiate a flexible work schedule with your employer. Many employers are offering greater flexibility to retain top talent.
Once you research your options and know what your potential pay gap will be, you need to estimate how much you will need to save before taking leave.
You should start to eliminate discretionary spending and reduce outstanding debt as much as possible. If you’re married, you and your spouse may consider living on one earner’s income for a while and putting the other’s income into savings.
You should test out your plan for as long as possible to make sure you can live on a lower budget. The last thing you want when taking time off for an emergency or to avoid burnout is being stressed about your finances.
Not all leave of absences can be anticipated so you may need to tap into your emergency fund. If you don’t have one, you should start saving now.
The general rule of thumb is to put away at least three to six months’ worth of living expenses in an emergency fund. You will want to place these funds in a vehicle that is safe from market risk, such as certificates of deposit (CDs) or high-yield savings accounts to ensure your money will be there when you need it.
It is best to tailor the size of your emergency fund to your lifestyle, while also taking into consideration how long you plan to be off of work as well as your risk tolerance.
It may be an overwhelming thought to try and save three to six months of living expenses. Or, for some individuals, it may make sense to stash away even more than six months of expenses. Here are a few tips to get you started:
- Stash away small amounts regularly and focus on building your savings a little at a time, rather than giving yourself a large goal upfront.
- Automate your savings. Set up a separate account for your emergency fund and have your contribution deposited automatically from your employer, or set up automatic recurring transfers. Out of sight, out of mind.
- Create a budget and stick to it. Don’t increase your monthly spending or lose sight of your end goal. Celebrate your successes when you reach them.
You can also boost your emergency fund by taking advantage of one-time opportunities to save. Try stashing away your tax refund, or for families receiving half of their 2021 Child Tax Credits as monthly payments, put them aside for emergency savings.
Don’t forget about any savings you usually put away with your regular paycheck.
If you are directly contributing to a retirement account, such as your company’s 401(k) plan or an individual retirement account (IRA), it may make sense to think about increasing your contributions before your leave to make up for the lost contributions during your absence.
It can be tempting to withdraw the funds you have built up in your 401(k) plan to cover your leave, but the penalties are steep and can eliminate any benefit.
Ready to start planning for your leave?
Regardless of the reason, your leave of absence will likely come with big changes to your lifestyle. Consider taking one less item off your plate and work with a financial advisor to get a plan in place. That way, you can enter your leave with peace of mind and confidence that you and your family will be taken care of no matter how much time you need.
Ready to start planning for your leave? Reach out to us to find a financial advisor that can help you.