Five Crucial Financial Steps Before Leaving Your High Paying Job

Five Crucial Financial Steps Before Leaving Your High Paying Job

In this episode of 'The Retire Early Retire Now' podcast, host Hunter Kelly, a certified financial planner and founder of Palm Valley Wealth Management, discusses essential steps high-income earners should consider before leaving their jobs. Topics cover maximizing benefits, building a cash buffer, reviewing health insurance options, understanding equity compensation, and running retirement calculations. Kelly emphasizes the importance of planning and consulting professionals to avoid financial missteps and ensure a smooth transition, whether retiring early, starting a new business, or taking a sabbatical.

00:00 Introduction to Retiring Early
01:14 Maximizing Your Benefits Before Leaving
04:46 Building a Cash Buffer
09:48 Reviewing Health Insurance Options
14:48 Understanding Your Equity
19:59 Running Your Retirement Math
27:58 Conclusion and Final Thoughts

Check out the Palm Valley Wealth Management Website
PalmValleywm.com

Check us out on
Instagram
LinkedIn
Facebook
Listen to the Podcast Here!
Apple
Spotify

Transcript

0:00

And welcome back to The Retire Early Retire Now podcast, where we dive deep into strategies that help high income earners achieve financial freedom sooner, live better, and take control of their retirement. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Manage. So here's the scenario. You've built a great career, you're making great money, and now you're thinking about leaving. Whether that's the pivot to something with more purpose, take a sabbatical, mantra, own business, or hopefully just like the title implies of this podcast, even retire early. Walking away from a high paying job is a huge move. But before you turn in that resignation letter, there are some smart financial steps you should take. Or at least some things that you should think through. In today's episode, we're going to cover five key things you should do before you leave your high paying job to avoid regret, and set yourself back for success. But before we jump in, if you like this podcast or you know, someone that is about to leave their high paying job, share this with a friend and leave a five star review on your favorite podcast and out. Now let's jump right into it. So first up, squeeze every drop out of your benefits. When you're a high income earner in a high income role, your benefit package can often be worth thousands or 10 thousands of dollars, maybe even more so before you leave max out your 4 0 1 KHSA in any deferred comp if you can. These are powerful tax shelters. And once you leave your contribution window closes. So take advantage of that. Now, use up your FSA funds because they're often use it or lose it. Here's a few ideas. Schedule, dental cleanings, fillings, sealants. So anything dental related that maybe you've been pushing off. Buy prescription glasses, contacts, or even get lasik. If you're like me, about 10 years ago I got lasik, I would have paid three or four times as much as I did, given my vision, what it was before LASIK and what my vision is now, not having to worry about contacts. Glasses and, and all those sorts of things, has been such a life changer. And, I can still vividly remembering waking up the next day and, having crystal clear vision. this isn't necessarily an ad for lasik, but if that falls into your category and you have some unused, FSA funds, that could be a good use of your funds. Stock up on over the counter medicines, first aid supplies, any other, health supplies that fall under, FSA eligible, if you have a significant amount in there, just remember that FSA accounts are generally. vast majority of the time are use it or lose it, so we would want to use it before we leave. Take advantage of dental and vision insurance before it expires. So just like a FSA, if you have some sort of reimbursement account or a more traditional type, vision or dental insurance, again, book those teeth cleanings x-rays. lingering dental work. go see your, eye doctor to see Maybe you need a new prescription or new sunglasses, new regular reading glasses, whatever that may be. go ahead and use it to your advantage. And then things in some things that you, maybe shouldn't. Overlook or shouldn't forget, a dermatology checkup for, maybe it's included in your health insurance, mental health counseling, therapy sessions, things of that nature. going to see specialists. So a few years ago I had a knee surgery. So if I was planning on leaving my job, if we were using, my group insurance, that would be. Perfect time, that if you have any lingering, medical type procedures or things that may be a hefty out-of-pocket cost, then use that insurance now while you have it. This is, this is about locking in the value, that you're, you're potentially walking away from. Think about it, like this, like you're grabbing everything you paid for before moving out of a house. It's your money, don't leave it on the table. So just remember, if you are, if you have a fair amount of quality benefits at your job, make sure that you take advantage of it before you start adding in, or make sure you take advantage of it before turning in that resignation letter. Number two, build six to 12 months worth of a cash buffer. Oftentimes you'll see financial advisors or financial quote unquote gurus say you need three to six months, but if you're leaving your job and maybe, you're not going directly into a new high paying job, maybe there's. some time built in there. You're taking a sabbatical, you're starting a business, whatever that may be. If there's more uncertainty, you're going to want a higher amount of cash on hand because things can be a bit more uncertain. So this one is a simple theory. A lot of high owners overlook this because they're used to a consistent income hitting their bank accounts every two weeks or every, every, other week, whatever that may be for you. And so when it stops, your entire financial rhythm changes overnight. So here's what I tell clients. You need or want at least six months worth of core living expenses in some sort of interest bearing account. That could be, some sort of short-term cd, three to six months. some sort of high yield savings account, maybe t-bills, depending on how much you have in there and what, the need is for. Obviously that's gonna change from person to person. Very personalized. but you would want some sort of interest on that just to, negate a little bit of that inflation and earn a little bit of cash on that money as well. so if your situation is more uncertain, obviously you would want a higher amount, maybe closer to six. Or I mean, closer to 12 months. so maybe you're starting a business taking time off, unsure about what your next source of income will be. Make sure you have a full year. So if you were completely retiring, I would be saying or singing the same, tip, or, the same, I would be saying the same thing. Right? You would want a higher amount of cash because the level of uncertainty is rising, right? And so what if that sabbatical takes a little bit longer than you thought? Or that business that you're starting takes a little bit longer than you thought to get revenue pumping to where you can replace your income. All of these things, you wanna make sure that you have a plan for. Not that we think, it's doomsday and. Nothing's gonna go right, and we need to have everything in cash. but we want to make sure there's a certain level of security so that if things don't go as planned, we're fine. for at least that six to 12 months before we have to start dipping into retirement accounts or, other types of mechanisms to, fund our expenses until we can make up that income. So now let me be clear. This is not just about mortgage, rent, and groceries. Think about it, health insurance premiums. So things that often people forget about health insurance premiums. if you're losing your employer coverage out-of-pocket medical expenses. expenses for kids, whether it be sports or their school tuition, daycare, anything involved with kids, obviously they are super expensive. if you're taking a sabbatical and you're wanting to travel, lifestyle, reoccurring subscriptions that you pay for, all of those things you want to take into account when you're building this 12, six to 12 month, cash reserve. So any or. any one time large expenses as well. So if you're buying a new car, move some sort of large vacation or trip on a potential sabbatical or time off that you're taking, we want to make sure that we're planning for this. I recently worked with a client who left their job, and so he thought he would land and he was starting a business. He thought he would land, his first couple of clients in the first two months and be able to start to generate some income, but it took about seven months. Before that actually happens. again, things may not go planned as planned, especially if you're starting a business. You may have this grandiose idea of what's gonna happen and you have this business plan and then the real world happens. that's why we wanna plan, to have some cash on hand so that when that business takes, double the amount of time that you thought it would take to, to get it going. you have enough runway to kinda get you there, as a buffer, right? so you don't have to take a complete step backwards or get rid of the business or whatever that may be. So if you're leaving your job and you're getting rid of that, W2 income lenders may look at that more negatively or will look at that more negatively, or with more scrutiny. So if you're thinking about refinancing or purchasing a property or a new home, applying for any sort of credit line. You do this before you leave your job so that, all the paperwork and documentation, all that, there's no hiccups with, Hey, why don't you have income anymore? this, this tip about cash isn't necessarily exciting or flashy, but it gives you the most, gives you what you need the most during a big transition. And that is time. And flexibility. So make sure that you have plenty of cash on hand. Number three, review your health insurance options. this is probably one of the most overlooked. Parts about leaving a high paying job. When people think about walking away from a big paycheck, they focus on income, but loss of employer provided health insurance can be just as impactful, especially for families or those with ongoing medical needs. So if you have a family. That can get expensive very quickly, especially if that employer was covering a lot of the premium cost, right? And so there's really three options that you have when you leave your employer. You have Cobra, you have marketplace insurance, and then you have a private health insurance or health sharing plans, that you can apply for. So COBRA is, most immediate and straightforward option with Cobra. You can continue the same exact coverage that you had with your employer. Same doctors network, same prescriptions for up to 18 months in most cases, but there's a catch. It's expensive. so now you're paying the full premium plus potentially administrative fees, things of that nature. So if your employer was covering 70 or 80% of that premium. Well now you're on the hook for that. And so again, that's what we talked about a little bit upfront. With the six to 12 months, we wanna make sure that we, we are assuming that there is gonna be some sort of increase in medical insurance costs. And, Cobra is not always the best option, but if you have an on, ongoing treatments or you're in middle of a pregnancy or just want to avoid the disruption, in your coverage, this could be the most convenient, but it's certainly is likely to be, the most expensive as well. Next option would be, marketplace insurance, and there's gonna be some changes here with a big, beautiful bill passing. But, as it was before that you could likely, or you could potentially get some sub substantial subsidies depending on what your income was. So if you were taking a sabbatical or retiring early, and you can finagle your taxable income to be below some of those thresholds, SHOs, than you could potentially get. sub substantially, subsidize from those potential, those health plans through the marketplace, through a CA, right? this can be a huge planning opportunity for, for something like this. but again, there's some changes coming. a lot of times we would pair that with, Roth conversions or capital gains harvesting things to help clients. With taxes and, and making sure that they stay under those thresholds. I mean, that's what we would do at Palm Valley Wealth Management. But again, changes are coming and sometime or that may not be as much of an option moving forward. The third thing is private health insurance. So you can get with an agent, and this is more of a niche opt option, but if you are healthy, self-employed or retiring early, you might explore private health plans or even potentially. I've had a couple clients over the years. Have what they called health sharing ministries. these aren't technically insurance plans, but, for some they can lower, lower the costs and bridge that gap, between Medicare. and before Medicare, and then post Medicare, getting Medicare insurance. just be careful. These plans often exclude preexisting conditions, and don't have the same consumer protections as Obamacare would. Other considerations, gap coverage, dental and vision, prescription coverages, and then utilizing, FSAs and things of that nature. So just do your homework here. get with a health insurance agent that can help you shop this and understand. Hey, is Cobra the best thing for me based off my situation? And all of this is super personalized, based off your health conditions, what doctors you see, whether you're just seeing a primary care or specialist, whatever that may be. you really should take time to think through all of this because the last thing you want is to be hit with thousands and thousands and thousands of dollars in medical bills, because you didn't do the right research up front. to make sure that your, health insurance was taken care of. So losing access to group health insurance can feel overwhelming, but with the right plan, you can protect your health, minimize your out-of-pocket, costs, and in some cases even come out ahead. I do, have a friend that, unfortunately his employer didn't cover much of his premium, and so he actually went through private insurance, was able to save a few hundred dollars a month through that. group insurance isn't always the most cost effective, right? In this case, he wasn't leaving his job at the time. but it does kinda show you like, Hey, if you do your research and maybe your employer's not covering as much, As some other employers, you might be able to go to the private market, or the marketplace and find something that's comparable, for less cost. So it just depends. Again, do your research. Number four, understand your equity. Game plan if you walk away. So if you're a high earner, at maybe like a tech company or something, there's a good chance that part or a significant amount of your compensation package includes equity. So things like restrict restricted stock options, I mean restricted stock units, stock options, employer purchase plans, employer stock purchase plans, performance shares. in this is where. Things get complicated very, very fast. you might have a significant amount of your wealth. So a lot of times, these employees, maybe start out early in, in these companies, a lot of their compensation is, equity upfront, and the next thing they know, 80, 90, 90 5% of their net worth is tied up in these stocks. So. Things can get complicated quick from a tax standpoint, from a concentration standpoint, Making sure that, you understand your situation is going to be huge here. So you might have a significant, like I just said, a significant amount of your wealth tied up in these, equity vehicles. And by timing your exit you can make or break how much of it you actually get and taxes and, and all those sorts of things. So first. Know what you own. So before you give a notice, take inventory, review your grant agreements, your vesting schedules, know how much already, is vested, and how much is on the way. So for example, let's say you're planning on leaving next month in August. But, a thousand, RSU units or, restriction stock units vest in October. This could be tens of thousands of dollars that you might just wanna hold off a few more months to get fully vested before exiting. I've seen people leave jobs early and later realize they walked away from quite a bit of money, that was Unvested stock because they just didn't know the timing of everything. So make sure that you understand this. if you have incentive of stock options or ISOs or non-qualified stock options, the clock starts ticking the day you leave. So most employers give you about 90 days to exercise after you leave. and so after that, they expire forever. Now exercising means you'll likely have to come up with cash to pay for taxes. and so the decision is not always simple. ISOs can trigger, a MT or alternative minimum tax. while. NSOs or non-qualified stock options are tax order income. Biggest thing here is to have a plan. So this is an area where working with a planner, tax advisor can really pay off. do you exercise early? Do you let someone, let options go? Do you accelerate income, or defer it to another year? The key is do not wait until you resign to start thinking about these questions. By then, you've lost leverage and maybe even access to the company equity portal. So if you leave and you can't get on a computer to start looking at these things, that's not gonna be, not gonna be a good thing, right? So make sure you start planning before you leave, and this is what this whole episode is about, right? Employee stock purchase plans. If you've been contributing to an, employee stock purchase plan, make sure you know when the purchase window is and if there's any lookback provisions, to let you go back and buy at a discounted rate or discounted price. How and when you'll be taxed on those shares. So even. After you leave, you might be able to hold that employer stock, for at least a year to qualify for long term capital gains rates versus the short term, which could be much more favorable. But many people sell right away and trigger higher taxes without realizing it. So just know what your tax implications are. if I sell now, if I sell later, what's going to gimme the most advantage from a tax standpoint? So if you're planning a career break or a sabbatical, your income might drop that following year. So that would be a perfect time to exercise options at a lower marginal tax bracket. if your company is planning on li having a liquidation event like a IPO or acquisition, hang tight, the equity could be worth a lot more soon. If you're joining a competitor, be aware of non-compete clauses, and potential. Forfeiture, or potential forfeiture provisions. So equity compensation is one of the biggest wealth building tools of high earners, but it also comes with the biggest learning curves. Don't assume that you'll figure it out after you leave. Once you resign. Your options narrow and literally, literally and figuratively. So just have a plan. Take a couple weeks to look at it, get a professional involved. If you are not quite understanding what your situation calls for, this is where a tax planner, financial advisor can really, be worth their money. because these mistakes can get into the tens of thousands, sometimes hundreds of thousands of dollars in taxes. if you. Don't plan correctly. Number five, and I would say this is probably the most obvious, but yet still very important, and that is run your retirement math. So if for whatever reason you are retiring early or you're taking an extended amount of time off, through a sabbatical or whatever the event may be, You should know your numbers right? And so this is where the mo rubber meets the road. If you're thinking about leaving a high paying job, whether that's to retire early, take a career break, or just start a business, you'll need to make sure that you, account for that math properly. I remember when I was starting Palm Valley Wealth Management, I was working for a firm, obviously previously, to Palm Valley. And I think I ran the numbers every day for three or four months. I think this was a little bit of a coping me mechanism. I was, nervous about leaving and things of that nature. I was like, does this math, like, is this math really that good? Does it make sense? but you gotta know your number and you got to, understand. How much you need and all those sorts of things. So most people focus on their income and assume that if they've saved a lot and they'll be fine, but a lot is relative. You need concrete math. So what you really need is a clear, customized projection of where you are today versus where you're headed or need to be based on real assumptions, not vibes or rule of thumbs or what you heard on YouTube or, or TikTok. For some guru, this is. obviously your real life situation, so take the time to research it. So let's break down what you'll need to look at. So these are some things that you should consider before running these numbers. So start by calculating how much you spend annually, to maintain your lifestyle without current, without your current paycheck. So that does not just include mortgage and groceries, it also includes travel, health insurance. anything related to your kids if they're still dependent on you financially? Property taxes, insurance premiums, lifestyle upgrades like boats, country clubs, second homes, whatever that may be for you guys. I like to call this your freedom number, right? So the whole point of this is for financial freedom. So what is your freedom number and the amount it costs to buy? Your freedom every year, right? So once you know that number, you can start to reverse engineer your withdrawal plan. So let's say realistic withdrawal rate. So a lot of people talk about the classic 4% rule. I believe you can get a bit more than that. somewhere around 5%. If you're willing to make adjustments throughout your retirement or throughout your time, drawing off these accounts, in good years, you can maybe pay yourself a little bit more in bad years. You understand that, hey, I gotta take a little bit of pay cut, to let this market recover, right? And so if you can do that and make those adjustments, I think you can. and I know you can take a little bit higher than that 4% rule, that everybody just throws out, without actually researching it. And. And understanding how withdrawal rates actually work. so things you want to consider with this withdrawal rate, your age, your time horizon, market conditions. other sources of income pension, social security, eventually, rental income, any part-time work if that's a thing that you want to do. so here's a quick rule of thumb number, even though I'm kind of bashing rule of thumb here earlier. so if you need$150,000 per year and you're using that five with 5% withdrawal rate, you'll need about$3 million in dollars of in investible assets. But here's a twist. If you're retiring at 45, it says 65. You may want to account for a little bit more than that, because your retirement is gonna last a bit longer, 20 years longer, right? So potentially 40 plus years if you live a long, prosperous life. we've talked a lot about this, in previous podcasts, but if you are doing that early retire. Have a plan to bridge the gap between age 59 and a half, and where you are currently. So most retirement accounts have a withdrawal restriction of 59 and a half, there's a few ways that you can get that money out. I have a whole podcast. for this, but, using a taxable brokerage account, I love that account. some of the advisors that I listen to and look up to, they call it their, their freedom account or, their hero account, whatever you wanna call it. the taxable brokerage account is going to give you the most flexibility, maybe not the best, taxes wise. but the, it is certainly gonna give you the most flexibility. there's a thing called rule of 55, where if you retire after 55, leave your funds and your 401k from that employer, you can use that without that 10% withdrawal period, penalty, leverage your, 72 t distributions. Again, these are all things I've talked about in a previous podcast, but just wanted to kind of spruce over them, uh, and then creating a backdoor Roth ladder. So all of these strategies to kind of bridge from age 59 and a half, or from where you are to 59 and a half, these are not DIY moves. These need planning, But when done right, you can create a smooth, tax efficient path through these early retirement years. And then lastly, this is where a planner can come in and that is model out what if scenarios. So things like this, what if the market drops 30% next year? In your first year of retirement, what if your business takes two years to become profitable? instead of one year like you thought, what if healthcare costs double? What if you live until 95? So these are all things, and some of these will be personalized based off your situation. What if my kids don't become financially independent? What if they need some sort of healthcare long term, whatever that may be, right? all these are personalized, but run those what if scenarios. and there's a bunch of different ways to do it through planning software and things of that nature. I like using e-money. that's the one I use at my firm. and it's for advisors, but there's other things that you can look at as well. there's plenty of planning softwares. and then lastly, taxes. when you leave your high income role, your tax situation is gonna change dramatically. if your income drops every few years, for, or if your income drops for a few years, you could do Roth conversions at a lower tax bracket. We've talked about that numerous times on this podcast. And, if you want to do another, if you want me to do another podcast episode on that, I love saving people taxes or at least putting them in a position to lower their lifetime tax bill. because like I always say, it is your largest, your largest expense over your lifetime, especially if you're a high income earner. you can do things like harvest gains when you have, that income drop for a few years. and you can realize income intentionally while you're in a lower marginal tax bracket, right? So through Roth conversions, harvesting gains, things of that nature. So tax savings over a 10 or 20 year span can add up to hundreds of thousands of dollars. But only if you plan ahead. And that is what I say a lot. That is the biggest difference between your CPA, preparing your taxes and your CPA or your financial planning, doing financial planning or doing tax planning, right? So they should be looking into the future, not just, nearsighted on, How much they're gonna save you in a given year. They should be doing moves, even if you have to pay a little bit more taxes. Now they should be doing moves that, Hey, in 20 years, if we look at a 20 year snapshot, my tax bill over that 20 years is going to me much less than, Then what it would be if I don't do these tax saving strategies, even if I have to pay a little bit more upfront, right? So running the numbers isn't about being pessimistic, it's about buying confidence, about being prepared, the confidence to leave your job that you've outgrown or, or not happy with, or want to do something else more fulfilling, the confidence to start something new. The confidence to live your life on your terms. And here's the thing. You don't just figure it out on your own right. It takes a lot of time planning, probably with a spouse or other people that you trust, like a financial planner. so at Palm Valley Wealth Management, we specialize in helping high income earners transition out of their demanding careers. Retire early. I love helping people through these big transitions because it is a very important decision. Probably some of the biggest decisions that they're ever gonna make. And so that's where I can really help and add value is through these big transitions, whether that be retirement, starting a business, taking a sabbatical, or just getting on a job that you don't like. Right? And so we build out full financial plans, tax plans, investment strategies to make. that leap with clarity and the biggest thing, peace of mind. So if you're interested or thinking about, jumping from this high paying job into something else, whether that be retirement, starting a business, whatever that may be for you. Go to my website, Palm Valley wm.com. You can look at the process on how I work with clients. you can schedule a call with me. There's no calls. We can just talk. you can get your questions answered, and we can figure out if we're a good fit, for your situation. So I appreciate everyone that has listened today. If you're thinking about leaving your job, hopefully this has given you some insight. If you know someone that is doing or considering, something just like this, please share this podcast episode with them. I'd love to help them out, whether that be through the podcast or potentially working with them. but again, thank you. For everyone that listens, please leave a five star review and we will see you in the next one. This podcast is for educational purposes only. It is not meant to be financial or investment advice. Do not make decisions solely based on this podcast alone. Please seek financial professional help if you're considering making changes in your own situation.