The Year Off Financial Risks (and how to avoid them)

A Year Off comes with some financial risks, but through proper preparation, I believe you can lower these risks. Bankruptcy is the worst case scenario, but I believe it falls under the group of things that probably will not happen while on a career break. Despite this fact, I think it’s important to think about it and do everything you can to prevent it.

Let’s take a look at some of the financial opportunity costs and ways to compensate for them. Then we’ll look at the possible causes of bankruptcy. And finally, we’ll look at ways to protect your biggest financial asset: your ability to make money.

What are some opportunity costs associated with a Year Off?

An opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. A career break definitely comes with some opportunity costs, but it’s important to keep in mind what you’re getting in return: the free time to pursue your dreams and live a life you want to live.

Here are a few of the financial opportunity costs:

• A year’s salary: You are not working for a year so you are not making your salary.

So how to make up for this? Work an extra year at the back-end of your career.

• Retirement contributions for a year: No money earned means no money deposited in your 401k or IRA. And this money, over the course of many years of compounding interest, will eventually grow into a large amount.

How to make up for this opportunity cost? Make a catch-up contribution at some point after your Year Off or work an extra year at the back-end of your career.

• Social security: By not working for a year, you are not paying FICA taxes and contributing to social security. This will lower your social security pay-outs when you start claiming them after you retire. Make sure to read up on social security and see how it works and make sure you have the 40 credits needed to qualify for social security before you start your career break.

How to make up for this lower social security pay-out? Contribute more to your 401k or IRA before your Year Off to bridge the gap in income when you retire.

Bankruptcy is the worst case scenario.

The biggest potential negative financial consequence of a career break is bankruptcy, which is the inability to pay outstanding debts. The main goal of your financial preparation and planning is to protect yourself from bankruptcy.

Let’s take a look at two of the potential causes of bankruptcy and how to avoid them.

• Taking a Year Off with a large amount of debt: If you have debt and you don’t have the money to cover your debt payments, it’s possible to go bankrupt. During a career break, you are not earning money to make these payments, so you need money saved to pay them. If you run out of money and you are not earning money, then you can’t make the payments and you have to declare bankruptcy.

How to avoid this? Pay off all debts before leaving your job.

• A large medical bill from an illness or injury: Let’s say you get in a serious accident while traveling. You need a med-evac and an expensive flight home and you rack up hospital bills. You are out of work and can’t make the medical bill payments, and you have to declare bankruptcy.

How to avoid this? Purchase travel insurance to cover the initial costs. Have an emergency fund to pay for the first costs upon your return home. Keep your medical insurance through COBRA or sign up for an Affordable Care Act health insurance plan.

Protect your biggest asset: your ability to make money.

Your biggest asset is you and your ability to make money, so it’s important to protect yourself and your ability to work when returning home from your career break. Here are some tips:

• Get a leave of absence from work: Before setting out on your year-long trip, work out a leave of absence with your job. Get some sort of guarantee of work when you return home so you can go right back to making money.
• Be ready to work a different job: If a leave of absence is not possible and you have to quit your job, prepare yourself to work in a different career field or a different line of work when returning home. It might be necessary for a while until you are able to find work in your given field again.
• Take care of your body: Be careful while traveling. Don’t be reckless. Avoid mixing alcohol and drugs with risky activities. Don’t be stupid! A serious injury or illness could disable you and prevent you from working when you return home. Get yourself in good physical condition before you leave your job, get all the necessary vaccines before traveling, and practice good hygiene while you are gone. Purchase travel insurance and carry a health insurance plan.

So in summary, prepare yourself financially before your last day of work.

Examine the opportunity costs and make up for them in the future. Look at the possible causes of bankruptcy and do what you can to avoid it. And figure out ways to protect your biggest asset, your ability to make money.

Remember the main goal of all this prep work is to remove all these worries from your mind while traveling. You want to live as spontaneously as possible and have no big worries on your mind because that’s where the feelings of freedom live.

What other financial risks do you foresee? What worries you the most about a career break?