5 financial mistakes to avoid when changing jobs.
Financial considerations you need to be thinking about when changing jobs.
By: David O’Leary
If you’re reading this you might have recently changed jobs or are looking to make a move. Heck, maybe you’re only daydreaming about leaving. Regardless, you’ll want to think about how a job change will affect your personal finances. Most people are so busy, nervous, and stressed about their career change, they don’t stop to consider these issues.
1. You don’t realize you’re free to move your pension
If you’re lucky enough to have a pension plan it’s probably a variety that is known as a “defined contribution” pension plan. You can read more about how pensions work here. While working with your employer, your pension is locked in. This means it must remain invested with the pension provider your employer has selected.
However, when you leave your employer, it becomes unlocked. This means you’re free to transfer it elsewhere.
If you leave your employer and say nothing, your pension will remain with your pension provider. You won’t receive any calls or notifications from anyone telling you that you’re free to transfer it out. That’s because your pension provider hopes that you don’t. This way, they will continue to collect fees from you as long as your pension stays put.
Unfortunately, many pension plans do not offer employees a wide selection of investment offerings. Furthermore, in many cases, their fees and level of service aren’t particularly attractive either. Since existing employees are captive clients, pension providers don’t need to be as competitive. It’s the same reason you pay so much for such crappy food at a Raptors game.
To continue the analogy, leaving your pension where it is after you’ve left your employer would be like eating at the stadium after the game is finished.
You can transfer your pension somewhere you’ll get better prices, more selection, and customized advice. If you already work with an advisor, that’s the logical place to transfer it. If not, you can transfer it to your bank or discount brokerage also. Whatever you do, spend some time finding a new home for your pension as soon as you change jobs; while you’re still thinking about it. This way you won’t forget and realize 20 years from now that you should have done more with it.
2. You don’t adjust your investment portfolio
If you’ve spent any time investing you’ve probably filled out one of those risk questionnaires before you open an account. Those questionnaires are important because they help an advisor determine how risky your investment portfolio should be. Remember, the more risk you’re willing to take, the better the return you can hope to achieve.
And the amount of risk that is appropriate for you is dependent on a wide range of factors such as when you’ll need access to the money, how much investment knowledge you have, etc. One of the factors that should be considered is the amount of risk that is inherent in your career.
All else equal, the riskier your job and the income it generates, the less risk you can afford to take with your investments. And vice versa. For instance, if you’re a tenured professor you can afford to take more risk with your investments than if you’re starting your own business or paid by sales commissions.
Therefore, if you’ve moved into a new job where your job stability or the predictability of your income has changed significantly, you should ratchet up or down the risk in your investment portfolio accordingly.
3. You don’t compare the pension plan differences when comparing job offers
It’s easy to get lured by a fancy title, prestige, or a fat salary/bonus. But don’t ignore the difference between company pension plans.
You may be going from or to a company without a pension plan. Alternatively, you may just be experiencing an upgrade or downgrade to your existing pension plan when you change employers. Since pension benefits are often quoted in percentage terms (e.g. an employer will match up to 5% of your salary), it’s easy to underestimate how much money that translates into.
For instance, if you go from an employer without a pension to one that gives pension contributions worth up to 5% of your $100,000 salary, this could net you an extra $70,000 in just 10 years. In 20 years, close to $200,000. It’s worth your time to sit down and do the math.
4. You don’t take the opportunity to grab a fat tax refund
If you expect your income to drop significantly because of your job change (e.g. you’re starting a business, taking parental leave, going back to school, etc.) then it may be worth contributing to your RRSP to take advantage of tax arbitrage. Put another way, you may be able to legally save thousands of dollars in tax for very little effort.
To explain, let’s take a step back. RRSPs are an attractive vehicle because any contributions you make to one get deducted from your taxable income. The end result is that you’ll often pay less tax after contributing to one. The trouble is, you’d normally have to leave that money in your RRSP until retirement, otherwise, you’d be taxed on the withdrawal and forfeit the tax savings you had earned.
However, that scenario changes if you expect your income to drop significantly in a future year. In this case, you can take the money you’ll need to use before retirement, contribute it to your RRSP and get the money back out while retaining much of the tax savings.
To my mind, this is easily the most overlooked benefit of an RRSP. You can read in detail about this strategy here.
5. You ignore the impact to your insurance coverage
If you currently have a benefits package through your employer, there’s a good chance you have some insurance coverage. That could include some degree of life, disability, and even critical illness insurance coverage. This is a wonderful benefit. But the trouble is, your coverage ends when you leave your employer. And replacing that insurance could be very expensive.
For the most part, personal insurance is priced at the time you purchase the coverage. From there on out, your rate does not change as you get older. So, all else equal, the younger you are when you purchase the insurance, the lower the monthly rate you’ll pay.
If you’re laid off or move to an employer without insurance coverage, you may be forced to purchase your own coverage. The older you are when this happens, the more expensive it will be. It’s impossible to quote a precise figure but we’re likely talking about thousands of dollars a year in costs.
Therefore, if you expect to lose your employer-sponsored insurance coverage in the future, it might be worth buying coverage on your own while you can get as low a rate as possible. At the very least, if your career change is going to result in losing insurance coverage, consider the financial impact of this in your decision-making.
This article was first published on Kind Wealth
About David O’leary
In cliché fashion, David’s life was transformed after a trip to Africa. His ensuing soul searching led him to quit his Bay Street career on a quest to effect positive change. Currently there are three levers David is pulling to make a dent. As Director of Impact Investing at World Vision Canada he is mobilizing capital to help the world’s most vulnerable people. He also founded Kind Wealth, a not-just-for-profit business helping millennials manage their finances in alignment with their values. And David sits on the board of Parker P Consulting; a social enterprise helping organizations of all shapes and sizes achieve gender equity.