Congratulations on the New Job. Time to Reevaluate Your Finances.
So you’ve just landed a new job after several years in your last position.
So you’ve just landed a new job after several years in your last position. You worked hard to establish yourself and develop the skills necessary for success, and now you’re ready for a higher level of responsibility and benefits.
A mid-career change can be both exciting and daunting. Once again you’ll be out of your comfort zone and looking to prove yourself in an unfamiliar environment.
Of course, there’s a new office and set of colleagues, but there’s also a chance to change many other areas of one’s life that may need improvement or adjustment. A new income and benefits package could mean entirely different financial circumstances.
With so many changes, a new job is a perfect time to evaluate one’s financial situation and incorporate changes for the best long-term outcome.
Here is a quick list of items that mid-career job changers may wish to analyze at the onset of a new position.
- Reassess Your Budget and Savings Plan
I’ve said before that positive cash flow is the cornerstone of any good financial plan. You must spend less than you make to meet long-term financial goals.
A new job can turn the cash flow equation on its head. With a significant increase in compensation, there are additional savings opportunities and individuals should plan for every surplus dollar.
If there’s already an emergency fund in place, and no other short-term cash needs like house renovations or even vacations, the additional funds should go towards long-term goals like retirement and education planning. Make sure that you’re proactive with cash flow, and give a job to every dollar.
The increase in income could also fund a current lifestyle goal, such as having a spouse stop working to take care of children. There is no best use of funds, it all depends on the financial priorities of the employee or employee’s family. So long as there is a proper discussion of short and long-term financial priorities, and those priorities are addressed, there are several constructive ways to leverage additional cash flow.
- Consolidate Old 401(k)s into an IRA
A professionally managed IRA generally has benefits over a 401(k). Assuming that you work with a professional fiduciary-focused investment advisor with a transparent fee structure, and you’ve designed the proper long-term asset allocation based on your goals and risk profile—it makes sense to roll the 401(k) into an IRA.
I’ve spoken about these benefits in other posts, but with increased investment selections, control over costs and the help of an investment advisor to avoid behavioral landmines, an IRA has benefits over a company plan.
Outside of the tangible benefits that one achieves through opening, funding and investing an IRA—there are also psychological benefits of knowing that the majority of one’s retirement funds are centralized and properly managed. For individuals that have had several previous jobs, there may be multiple prior 401(k)s with various institutions—essentially floating in space for several years without maintenance. Opening an IRA and consolidating these accounts will provide peace of mind that all retirement funds are working toward a common goal.
- Analyze Changes in Insurance Needs
If using a factor of income to determine insurance needs, it follows that a higher income would call for increased insurance coverage.
A new employer should offer group insurance at favorable rates with base coverage at roughly three times salary. With additional coverage likely required, look first to whether the employer allows for increased coverage amounts because the group rates are inexpensive.
If the employer’s total offering isn’t enough to provide coverage, look to purchase inexpensive term insurance from an outside provider. Although insurance from outside providers may offer less competitive rates than employer coverage, it’s still very affordable and offers the benefit of portability. This means that the coverage remains in force regardless of the insured’s position, which creates convenience and flexibility for future life changes.
- Take Command of Employee Benefit Packages
Everyone remembers the first day of a new job where an HR representative walks you through the myriad of options in the benefits package. With the excitement and perhaps anxiety associated with a new position, the last thing we think about is the best option for short or long term disability coverage.
But these things shouldn’t be taken lightly, nor should a decision be made in haste. New employees should, at the very least, carefully review each option and make a deliberate choice. This is where the help of a seasoned financial planner can benefit an employee—from a substantive and administrative standpoint.
With intimate knowledge of the employee’s finances, a financial planner can review the benefits package and make recommendations that achieve the best results with minimal stress.
- Evaluate Other Income Based Changes
A new income could mean other changes, such as the ability to contribute to a Roth IRA. Married filers earning up to $183,000 can contribute up to $5,500 each into a Roth IRA. The contribution is limited for those that earn between $183,000 and $193,0000, and the contribution is disallowed for married filers with earned income above $193,000.
Often times people automate their Roth contributions. If an automatic contribution continues in a year where joint income is greater than $183,000 (or $116,00 for single filers), one may run afoul of Roth contribution rules.
A higher adjusted gross income (AGI) could also change the income tax equation. A higher AGI could mean limits on certain credits and deductions. With higher wage income, there is also a possibility of falling within the Alternative Minimum Tax (AMT). These are all items that should be reviewed or discussed with a financial planner or CPA to avoid surprises at tax time.
A new job can sometimes feel like a new life. Individuals should channel these changes into new habits for long-term success. If you’ve recently started a new position and want to use this as an opportunity to revisit or craft a financial plan, contact a financial planner today to set up an introductory meeting and review your financial priorities.