Career Change at 40 or 50? Financial Strategies to Fund the Transition

November 28, 2024

Gone are the days of spending your entire life at the same job. For many, a career change is the new norm; on average, people change careers at least three times in their lifetime.

Even though it is increasingly common, changing careers in your 40s and 50s can feel daunting. You probably have responsibilities that those in their 20s and 30s aren’t worried about, like a house, kids, or aging parents. Even with these responsibilities, changing career paths and following your dreams is never too late. In this article, we will cover how to plan for a successful career change in your 40s and 50s and help you seamlessly fill the financial gap while jumping from your current career to your dream job.

Assess the Financial Impact

When you change careers, you will almost certainly experience a financial impact. The first step in preparing for this significant life change should be having a plan to get you through the transition. You will likely have to part with your current income to build a new career. However, building up a little extra cash with a side hustle is wise before jumping in at your new job. You’ll want to assess the cost of the new shift you are considering, which is an excellent way to ensure you can survive the transition.

Estimating how long it will take to settle into your new job and understanding how much you will need to have saved up to get from point A to point B is an essential first step in planning for the future. Your timeline will depend on whether you need additional training or education, the new field’s job market, and your industry connections.

You must also understand how this career shift will impact your short- and long-term income. You may have to start from scratch and expect to take a big hit on your current income. However, in 5 years, your income may multiply in ways you could never have achieved at your current job. Regardless, be realistic about the income changes. Come up with a realistic range of expected incomes for each year after leaping.

You may also need to consider the costs associated with the career transition, whether a professional degree or certification, rebranding, etc. Once you understand your timeline, the costs, and changes to your income, you can begin to create a realistic savings plan and budget to start a new career.

Build a Transition Fund

Once you understand what it will cost to switch careers, you can begin building a savings fund that will carry you through the transition. Many factors determine how much you will need to save up for your career change. They include your lifestyle and existing financial obligations, the time it will take to find your footing in a new career, and how you plan to fund the transition. If you don’t already have savings in place, you will want to think about how to build them up fast.

Strategies for building savings quickly include:

Cutting unnecessary expenses. Take a close look at your spending and identify areas where you could cut down. Cooking more meals at home, canceling unnecessary subscriptions, and reducing travel are all ways to reduce spending.
Follow the 50/30/20 rule. The 50/30/20 rule is another tried and true method for boosting savings. It involves budgeting 50% of your income for daily needs, 30% for wants, and 20% for savings. You can take it a step further and budget only 20 or 10% for wants and the rest for savings to maximize your contributions to your transition fund.
Temporarily increasing income. Working overtime or taking on side gigs allows you to put extra cash directly into your transition fund. There are lots of creative side hustles out there that can help bolster your income.

Managing your career transition fund and other financial priorities is key, especially for those in their 40s or 50s. At this age, you are likely still building your retirement portfolio and may have other savings goals, like saving for your children’s college education or buying a home. Finding the right balance may be challenging, but it is worth drawing out an appropriate timeline for starting a new career that aligns with your other financial goals.

Explore Funding Options for Retraining

One of the biggest expenses facing those gearing up for a midlife career change is the cost of obtaining new skills through training programs or higher education. For better or worse, there is no one-size-fits-all strategy for funding your career transition and deciding which avenue you’ll take is highly specific to your unique situation.

Employer-Sponsored Education Programs:

Some employers sponsor higher education or training for current employees. If your company offers this, and the training is in an area you want to transition to, it is a unique opportunity worth thoroughly considering. Even if it is not a part of company policy, it doesn’t hurt to reach out to your superiors to see if your employer will help pay for training that will help you take your career to the next level.

Adult Scholarships and Grants

There are lots of scholarships out there designed specifically for adults making a midlife career change. These are a great way to help offset the costs of returning to school and give those in their 40s and 50s a competitive edge when applying for scholarships

Student Loans

Federal and private student loans are another option for helping midlife career changers pay for tuition or professional training courses. While these are good options in the short term, consider how the loan payments will affect you down the line.

Retirement Funds

Using retirement funds to pay for education costs can seem enticing because it gives you immediate access to cash. Some think of using retirement savings to fund their career change as an investment in their future and expect that their new career path will more than makeup for the ding to their retirement savings. But, by taking money out of your retirement fund, you will lose out on the compound investments you have been building. If you pull money from your 401k, you will also face a 10% early withdrawal fee. Before pulling the trigger, consider the pros and cons of prematurely dipping into your retirement savings.

Adjust Long-Term Financial Plans

Unfortunately, most don’t have access to unlimited cash. You’ll have to adjust to other long-term financial goals to make room for a career change. Retirement savings and goals are two of the first areas to look at. First, you might decrease or stop contributing to your retirement savings account when transitioning careers. You may even dip into your retirement savings to pad your career transition, which impacts your overall retirement savings plan. Second, building your way up to where you want to be in your career takes time, and because you’re starting later in life, you may need to postpone retirement longer than you had initially planned.

Your current investment strategy may also shift during the transition. While shifting careers, you will probably have less to contribute to your investment portfolio or even use the money you have earned from investments while out of work. A financial advisor can talk you through how to pivot your investment strategy in the short run and how you can work towards your long-term investment goals in the future.

Your health insurance is another important consideration when changing careers. Most Americans depend on employer-sponsored health care, which will disappear when you leave your current job. Luckily, other options exist, like the health insurance marketplace through the Affordable Care Act or Medicaid if your income is below a certain threshold. Short-term health insurance is another option. It may be ideal for those who will only experience a temporary gap in coverage while between jobs.

Manage Existing Financial Obligations

Managing familial financial responsibilities is one of the biggest challenges for 40- and 50-year-olds making career changes. Many might even feel guilty for prioritizing their career goals at this stage. Don’t let these concerns hold you back. With a financial plan in place, it is possible to follow your dreams while also providing for your family. It might even allow you to provide more for them in the long run. Whether through savings, a side hustle, or loans, it is possible to do both.

Managing basic expenses, like your mortgage or rent, is another fact of life you can’t ignore when planning for a career change. Saving enough to pay your rent or mortgage payments for the time you expect to be out of work is imperative. You can also consider downsizing or living with loved ones to shave down costs. Budgeting for a career transition should also consider any existing debt payments you are still paying off, including student loans or credit card debt.

Tax Considerations

When making a career change, taxes might be the last thing on your mind, but they shouldn’t be. Taxes are an important part of your financial plan, and depending on how you fund your career transition, tax implications should be considered. You may move to a lower tax bracket if you choose to live off of savings for a while, an essential consideration for budgeting.

There are certain tax breaks when you are pursuing higher education. They may include the Lifetime Learning Credit and the American Opportunity Tax Credit, so make sure you take advantage of any that apply.

Maintain Financial Stability During the Transition

Creating a budget is key when living off of your savings. The upside is you know exactly how much money you have available and how long it will last you. Considering your financial responsibilities, this gives you a good benchmark for how much to budget each month and how long you can last without a stable income. That said, don’t forget to build flexibility into your budget if the unexpected happens.

Emergency funds are vital when you are not taking in a regular paycheck. Above all else, they provide peace of mind and help you feel confident about switching careers. An emergency fund will be useful if the job search takes longer than expected or any unexpected costly events, such as medical bills or natural disasters, pop up.

It’s important to prepare for the possibility that the hiring process could take longer than expected. Having an emergency fund allows you the patience to wait to find the perfect job that you have already sacrificed so much for.

Expert Advice and Resources

You’re not alone if your current patterns and lifestyle feel too ingrained to make room for a new career change. Don’t be afraid to seek resources that ease the burden of a career transition. Many tools and apps help you map out a budget based on your savings goals, lifestyle, and expenses. You may even want to speak to a financial advisor to help you make a career change at your age.

A Career Change that Leads to Fulfillment

Being realistic about your future and creating a plan based on those realistic expectations is the simplest and most practical way to start your midlife career change. With a plan in place, an emergency fund, and the ambitions to pursue the job of your dreams, a fulfilling career is at your fingertips.

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