Photo by David St. Germain

Ch-ch-ch-ch-changes… Every year, trees do it beautifully. For them, change comes at little or no cost. The same is true for some lucky career changers, who happen to want a change that doesn’t require a major investment in additional education or business start-up costs, a big pay cut, a period of under- or unemployment, or an expensive relocation.

But for others, the numbers can really add up. This isn’t necessarily a dealbreaker since, for most, it’s not all about the money. But as discussed in the previous post, you’re better off doing the math before your leap than finding out later — after you’re broke — that you fall into the latter category. Here are a few examples:

• Total ~$0 – After 20 years in the military, a mid-level manager wants to try his hand in the private sector. His modest living expenses are less than he’ll receive in military pension income if he retires today, and health insurance is covered. Even if it takes him a while to find his dream role, he won’t have to lay out any cash in order to make this change.
• Total ~$20,000 – A tech writer at a large firm wants to become a contractor instead of a full-time employee to gain flexibility in the hours she works. She gets health insurance through her spouse’s employer and, although self-employment taxes will hurt cash flow, she sees a lot of opportunities for ramping down living expenses. Still, she estimates it may take a year or so for her income to reach target levels, so the family expects to see a shortfall in combined household income vs. expenses.
• Total ~$120,000 over 5 years for a software marketing manager who wants to start her own financial planning practice – This includes the cost of the CFP® education, participation in related professional organizations, business start-up costs, plus enough to cover the gap in skinnied down living expenses for the 3 – 5 years it usually takes a business to get up and running.
• ~$70,000 each year post-change – An executive at a high-tech firm — the family’s sole breadwinner — wants to leave corporate and become a public school teacher, a job at which his income is expected to be dramatically lower. He thinks it might take up to 6 months to find a job, so his costs to transition include living expenses plus private health insurance for the family for that period, about $70,000. Currently, the family spends about $70,000 more a year than the anticipated future income from the teaching job, so in order to pull this change off without going broke, they will need a portfolio that can support annual withdrawals of that size — or a plan to reduce expenses. (Hint: This is an especially good candidate for a detailed career change financial plan.)

That range of examples should give you some idea as to how to calculate what you’ll need for your Escape Fund — my term for the cash stash required to get you safely to the other side of your transition. (NOTE: This is not the same as an Emergency Fund, the cash reserve fund recommended for everyone regardless of career plans.)

The astute observer may also be wondering about the less obvious costs — opportunity costs and/or longer term impacts — that a career changer may incur. These costs, as well as the benefits, absolutely should also factor into your career change financial plan, so be sure to watch this space for discussion on those topics in future posts.

Photo by Ryan Finnie

In case you missed my recent ten timely tips newsletter… a special follow-up to career changers using 529 savings to cover back-to-school expenses: computer technology, related equipment and/or related services such as Internet access now count as qualified expenses. i.e. You can use tax-free dollars distributed from 529 plans to pay for these items.  The catch: This feature expires at the end of 2010.  Be sure to review the details and plan your spending accordingly.