You might hit a point in your career where you need to pause, take time off, and pursue other interests, or in some cases, focus on healing. Maybe you’re feeling burned out from years of hard work and considering early retirement, whether by choice or because your role was unexpectedly phased out. Or perhaps it’s time to step back to care for a loved one.
Whatever the case may be, it’s important to understand how your time away could impact your financial standings, benefits, and progress toward your long-term goals. If you plan on returning to work, it’s also good to know whether your job is protected in your absence.
Here’s what Massachusetts residents should know before stepping away from work, either for temporarily or for good.
Leave of Absence
A leave of absence can happen for many reasons, either planned or unplanned, and extend for days, weeks, or even months. While you can’t always plan for your leave (especially when it comes to a medical emergency or death in the family), you can take some time now to understand your options and consider how such an event may impact your financial situation and job security.
There are three primary types of absence to consider here:
Personal or Unpaid Leave
Typically, this will be the shortest amount of leave time, which you may be able to cover with your personal days, vacation days, or sick time.
Your employer may also allow you to take unpaid time off, though this is typically at the discretion of your work agreement, boss, or HR department. Aside from the personal or sick time you accrue as part of your contract, your company is likely under no obligation to protect your job in the event you must take extended unpaid leave.
Medical Leave
You may have to leave work temporarily due to a serious medical condition or to care for a child, spouse, or parent with a serious illness. If that happens, your job may be protected under the Family Medical Leave Act (FMLA) as long as all criteria are met.
FMLA is a federal law that allows employees to take up to 12 weeks of unpaid, job-protected leave per year. We want to emphasize here that FMLA protects your job, but it does not guarantee your employer will pay you during your absence. It does, however, require your employer to keep your health insurance policy in place.
Notably, the FMLA only applies to companies with 50 or more employees, and you’ll need to have worked at your company for at least one year.
Short-Term & Long-Term Disability
Some employers will provide disability insurance at no cost to the employee, though some companies do make it an optional benefit.
If you’re unable to work due to a serious injury or illness, short-term disability will cover a portion of your income (typically around 60% to 70%) for the time you’re out of work.
Short-term disability coverage applies to medical conditions that keep you out of work for a limited period of time (usually up to a few months), while long-term disability insurance can be used in the event your condition keeps you from working for a year or longer (even 10 years or more). Typically, long-term disability insurance has a longer, more involved approval process than short-term disability, meaning you could be without benefits for several months before insurance kicks in. Read more about disability coverage on our blog, “3 Big Reasons You Should Consider Buying Supplemental Disability Insurance.”
Massachusetts Paid Family and Medical Leave (PFML)
Aside from the federally mandated FMLA, the state of Massachusetts offers additional job protection for employees called Paid Family and Medical Leave (PFML).
For those who may experience a medical or family emergency, the PFML offers up to 26 weeks of paid leave, which is funded by payroll taxes and administered by the state.
This is a separate benefit from employer-offered short-term disability insurance, meaning you may be able to utilize both under certain circumstances. If this is the case, typically the PFML will payout first, and any additional income you’re entitled to will be issued separately by the insurance provider.
Another advantage? PFML applies to all employees, regardless of employer size.
Sabbatical
Sabbaticals are most commonly used by employees at tech companies, universities, or large multinationals, though they aren’t available to everyone.
To qualify for a sabbatical, the employee must have a long tenure with the organization, usually seven or more years. Often, a sabbatical comes with a certain purpose, such as immersing yourself in a different culture, conducting in-depth research, or otherwise expanding your horizons.
Most universities will pay professors who take sabbaticals, but pay is not guaranteed or federally mandated.
The good news is, sabbaticals are often planned well in advance, which gives you time to get your financial house in order before taking time away from work.
Early Retirement
When we say “early retirement,” we’re referring to the idea of retiring before a traditional retirement age (like 65). While achieving financial independence early is exciting and rewarding, entering retirement at a younger age can cause some challenges.
Namely, you won’t have access to traditional retirement income sources or federal programs when you retire early—at least not for the first few years of retirement.
Retirement Accounts (401(k) and IRA)
You must be at least 59.5 to access funds from your 401(k), 403(b), IRA or Roth accounts without penalty.
That means that until you have access to your retirement accounts, you’ll need other sources of retirement income such as:
- Taxable brokerage account
- Savings
- Interest and dividend income
- Earnings from an investment property
- Business interests
Keep in mind, your retirement accounts sometimes include a tax advantage. Roth accounts, for example, can produce tax-free income in retirement. You may need to prepare for a higher tax bill earlier in retirement, when your income sources are limited and less tax-varied.
Pension Plan
If you’re lucky enough to have a pension, your plan provider may allow you to begin collecting benefits early—sometimes as early as age 55. Your contract and plan details should specify whether early retirement benefits are available. Check with your human resources department or plan administrator for more information.
Social Security
The earliest you can begin collecting Social Security is age 62, though doing so will lead to a reduction in benefits.
If you’re able to cover costs in retirement through other income sources, it may be worth waiting until full retirement age (usually 67) to start collecting. The later you wait, the higher your monthly benefits will be. Each month you delay starting benefits between full retirement age and age 70, you’ll receive delayed retirement credits, which increase your total monthly payments by up to 8% per year.
Don’t Forget About Health Insurance
Aside from limited access to traditional retirement income sources, you’ll face another challenge: healthcare coverage. Medicare is the federally funded health insurance offering for retirees, but you won’t be eligible to join until you turn 65.
If you opt to retire early, you’ll likely need to find other ways to obtain coverage (and they may be more expensive than what you’re used to paying).
Some options for obtaining health insurance coverage in early retirement include:
Joining a spouse’s plan: If your spouse is still working and has access to health insurance through his or her employer, you can use a “special enrollment period” to join their policy.
Using COBRA: Extend your existing coverage through COBRA. Typically, you’ll have the option to keep your existing coverage from your employer for up to 18 or 36 months. The catch is, your employer will no longer subsidize the policy. You’ll be responsible for paying the full premium each month. For this reason, COBRA is usually the most expensive option.
Browse Massachusetts’ marketplace: Find coverage on your state’s insurance marketplace. If you’re unable to join a spouse’s policy and otherwise don’t have access to insurance, you may be eligible to sign up for a policy through your state’s insurance marketplace.
Maintain employer coverage: In rare cases, some employers will offer retirees the option to maintain their coverage into retirement.
Read more about this topic on our blog, “How to Navigate Health Insurance During an Early Retirement.”
Considerations for Your Financial Plan
Anytime you experience (or plan to experience) a change to your income status, it’s a good idea to revisit your financial plan with an advisor. Consider how a drop in income could limit your ability to fund your savings or investment accounts or impact your ability to meet your monthly financial obligations.
On the other hand, if you anticipate lower-than-usual income this year, there may be opportunities to do some proactive tax planning. A Roth conversion, for example, might be worth considering. Or, if you’re offered equity compensation, exercising and selling options during a low tax year could limit your tax liability, too.
Thinking About Taking Time Off Work? Let’s Prepare Together
Taking time off work can be rejuvenating or necessary, but it’s not without some complications. You’ll need to review the fine print of your employee handbook or contracts and talk to your HR department if you still have questions.
Our goal is to help you prepare your financial situation ahead of time, so fluctuations in your income don’t derail your long-term goals or security. If you’d like to learn more about how we can help you build a dynamic, adaptable wealth strategy, don’t hesitate to contact our team today.
