Job Change: 101
It used to be common for people to spend their entire career with one employer. But times have changed. These days, it is estimated people will change jobs five to seven times during their lifetime. This change can mean any number of things. You may be performing the same job for a different employer, moving up the ladder to take on more responsibility, or changing to a completely different line of work. Whatever the situation, if you're thinking about a job change, there are important things to consider before taking the next step. A closer look at your financial plan will help you stay on track during the transition and beyond.
People often move to a new employer for higher compensation. These moves can give you the opportunity to better realize financial goals, pay off high interest debt and allow you to maximize retirement savings. If you're changing your career path completely, higher compensation may not necessarily be the result. The key to dealing with any change in household income, whether an increase or decrease, is to revisit your financial goals and your day-to-day cash-flow needs.
Depending on your personal needs and the coverage that the new role offers, you may need to budget for replacing benefit coverage at your own expense. Be sure you do your research to understand how much this may cost.
The rules governing pension plans in Canada vary from one jurisdiction to another. But in general, once you've been a member of a pension plan for at least two years, you're entitled to the contributions your employer has made on your behalf. If you move on before the two-year period is up, you may be leaving some money on the table. Most pension plans also establish an age beyond which you no longer have the option of transferring the lump sum value to a locked-in RRSP. It is important to investigate this aspect thoroughly before you make a commitment to leave.
The advantage of a higher paying job can quickly be eaten away by relocation costs. Will your new employer cover the costs of hiring a mover, selling your home, cancelling a lease and the myriad of other expenses that come along with relocation? You must also consider how your financial goals will be positively or negatively affected by the cost of living in your new location. It's definitely a time to re-evaluate your plan.
It has been said more than once–last one in, first one out. It's prudent to keep in mind that, as the new kid on the block, you may be more vulnerable to cutbacks if your new employer experiences financial difficulty. It's always a good idea to have an emergency fund set aside that would cover your expenses for at least three months, and even more important when you're in the midst of a career change. A TFSA is an ideal place to hold these savings.
Salary is just one consideration when you are adding up what a new job is worth to you financially. Other forms of compensation include bonuses, incentives like stock options and even signing bonuses for coming on board. In addition to these, there may be great value in the pension and/or benefits offered by a new employer. You need to take the time to really understand any other compensation that's part of the package. Your ability to make an informed decision about what's the best fit for you will help you come out ahead if you're presented with a choice. You may have the opportunity to select from group RRSPs, defined benefit or defined contribution pension plans, or other forms of employer-assisted savings plans. All of these can really add up when it comes to achieving your short- and long-term financial goals.
A job change can be a very exciting time, full of new opportunities and possibilities for you and your family. At the same time, moving to a different situation can present challenges and changes. Regardless of the details, any change in job can impact your financial plan for the future.
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* BMO financial planner refers to Financial Planners, Investment and Retirement Planning that are representatives of BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal.