What to do before you quit your job (advice from a Human Resources Executive)
If you’re thinking about leaving your job before you have your next one lined up, there’s a long list of things to take into consideration. While you’ll want to get your finances in order, and I touch on that briefly here, there are many great resources already available to help you with that exercise. Rather, this article is focused mainly on how you can maximize your current employment before you walk away.
Getting your finances in order
Planning for your financial needs during a period with no income boils down to your risk profile and your cash flow needs. Your risk profile will drive how many months you decide you must be able to fund while you look for your next gig. It’s extremely important, especially if others are financially dependent on you. Experts agree you should have some savings set aside before you quit, but you’ll see estimates ranging from 3 months to 12 months’ worth of living expenses, in addition to an emergency fund. Before you despair, though, think about the cash flow equation that defines your “month”.
Cash flow needs are largely about the timing of money in and money out. But the size of your need itself is a relatively flexible thing. First, get a really good understanding of your “money out”. If you need help with this, simply Google “how much savings do I need before I quit my job” and look for tools like worksheets, checklists, and calculators. Then think about ways you can decrease this number – what can you downsize or do without, for example. You can also impact your cash flow, and therefore how much you need to have saved ahead of time, by increasing your “money in”. Do an internet search on “side gigs” for a wealth of ideas, even if you don’t have any special skills or own any rentable property.
If you’ve been through the exercises above and decided you’re ready to actually leave your current employer, here are five things to get a grip on … BEFORE you turn in your resignation letter and do the happy dance on your way to the door.
Mistake #1: Not knowing your obligations
Make sure you know what you’ve agreed to. Scan through the employee handbook, and ask to review your personnel file. Did you sign a non-compete clause, non-disclosure agreement, confidentiality policy, etc. when you accepted the job, or as part of an employee handbook or other document?
Think about any money you’ve received from your employer for signing on when you accepted the job, reimbursement of expenses for tuition or relocating, etc. These benefits often come with “claw-back” arrangements if you leave within a certain period of time after receiving them.
If your compensation includes an incentive or commission pay program, make sure you know the rules for payouts. It’s common for these plans require you to be actively employed on the date the payment is made in order to be eligible.
Another important thing to be aware of is your employer’s practice with regard to departing employees. Will you be allowed to work through your notice period? Or will you be walked to the door immediately? If they tend to walk people out on the spot, you’re unlikely to get paid past that date, and you’ll no longer have access to any documents or materials you hoped to take with you.
Mistake #2: Leaving money on the table
Check on your employer’s vacation or PTO policy to see if unused time will be paid out after your employment terminates. If not, you’ll want to try to use as much of it as possible before you leave.
Does the organization’s 401(k) plan have a vesting schedule? The date you choose to leave might make a big difference in how much of that money you can take with you.
HSA account balances belong to you and can’t be clawed back by the employer. But any FSA funds you haven’t used will be left behind. The Uniform Coverage Rule applies to medical FSA funds (but not to dependent care funds). Under its requirements, you have access to the full amount you elected for the year, regardless of how much you’ve put in. So for example, if you elected $1200 for the year and have a $500 expense in February, you’re entitled to reimbursement for the full amount, even if you leave in March after only contributing $250 to the plan.
Mistake #3: Leaving without a plan for insurance coverage
If your employer has been your source for health insurance, be sure you understand the full cost of that coverage. You can most likely continue it through COBRA, but any subsidy your employer’s been paying will go away, leaving you with the whole enchilada. If that’s your situation, and the cost of coverage is unpalatable, research other sources and costs of coverage available to you before you leave.
With that in mind, it would be a good idea to get up to date on all your routine visits and procedures before you leave – annual physical, dentist and vision appointments, immunizations and cancer screenings, etc.
Other coverages, such as life and disability insurance, will be left behind. Sometimes you’re able to convert a life insurance policy to individual coverage, but you’re likely to get a much better deal if you buy it on your own. Another good thing to research before you leave, if these coverages are important to you and/or your family.
Mistake #4: Not understanding your 401(k) plan options
In addition to the vesting schedule mentioned above, there are some other important aspects of your 401(k) funds you should be aware of.
If you’re thinking of using some of that money to tide you over, be sure you understand the taxes and penalties associated with distributions. Unless the money is from your own Roth contributions, you’ll pay regular income taxes on it in the year to take it out. And if you’re under age 59 ½, hefty penalties will apply as well.
If you have a current loan from your 401(k) account at the time your employment ends, in most cases your remaining balance will become due within a short time (probably 60 days). If you don’t pay it back, it will be treated as a distribution in the current tax year. That means taxes and potential penalties as described above.
You’ll also want to understand your options for keeping your funds in the plan or rolling them over after you leave.
Mistake #5: Not planning ahead for your debt
When it comes to being smart about your debt, there are some things you can only do after you’re no longer employed. For example, once your income has been reduced, you may qualify for special provisions with lenders for your mortgage or student loans.
But some things become much more difficult when you don’t have the same steady income. It’s hard to qualify for a new loan or refinancing, for example. If you’ll need to purchase a vehicle or want to draw on home equity, it will be better to get those arrangements in place before your employment status changes.
You may also need to think about how you’ll finance a new business if that’s the direction you want to go. You’ll struggle to get traditional business loans before you have ongoing revenue. Credit cards for startups and new businesses might be an acceptable solution, but be aware they rely heavily on your personal credit score for qualification.
Any one of these mistakes can lead to nasty surprises, at a time you’re likely to be under some extra stress already. With a little advance planning, you can avoid the mistakes and maximize the benefits available through your current employer before you leave.