July 14, 2024
Financial Experts Say This Is How Much Savings You Need To Take a Year off Work

Taking a year off from work isn’t just a pipe dream — it’s something within reach as long as you’re careful with your financial planning. You can’t simply save up some random number. There are many factors to take into consideration.

“As a CPA with over 10 years of experience, I recommend saving at least 6-12 months of expenses before taking an extended leave from work,” said Nischay Rawal, certified public accountant and founder of NR Tax & Consulting.

For most people, he said this translates to $30,000 to $60,000 in cash reserves. 

“Be sure to also budget additional funds for major purchases like health insurance, mortgage payments or childcare,” Rawal said.

Dennis Shirshikov, head of growth at GoSummer and finance professor at the City University of New York, said there are many things to factor in.

“Determining the amount of savings required to take a year off work depends on various factors, including your current lifestyle, ongoing expenses, and potential unforeseen costs,” Shirshikov said.

Here are some key considerations and a strategic approach to calculate the necessary savings:

Have A Clear Plan In Place

“From working with countless small business owners, I’ve found a 3-6 month trial run is ideal for testing the waters and accurately estimating costs,” Rawal explained. 

For this, he recommended paying off high-interest debts and cutting discretionary spending before leaving your job. 

“Have a clear plan for how you’ll spend your time to avoid restlessness or boredom,” Rawal said. “For example, a client saved $50,000 over 2 years before taking 4 months off to travel Europe with her family. By budgeting $15,000 per month for the trip, she returned with $10,000 leftover and priceless memories. Now recharged, she’s focused on new career opportunities.”

With discipline and planning, experts note that an extended sabbatical can be rewarding personally and financially. 

“But go in with realistic expectations of what you can afford so you’re not forced back to work prematurely or return with substantial debt,” Rawal said.

With adequate preparation, Rawal says you can confidently take the time you need to recharge and gain a fresh perspective.

Calculate Your Annual Expenses

“The first step is clearly understanding your annual expenses,” Shirshikov said. 

This includes all fixed costs like rent or mortgage, utilities, insurance and any recurring bills, as well as variable costs like groceries, dining out, entertainment and travel. 

“For instance, if your monthly expenses amount to $4,000, your annual expenses would be $48,000. It’s crucial to be meticulous in this calculation to avoid any shortfall during your year off,” Shirshikov said.

Factor in an Emergency Fund

An emergency fund acts as a financial buffer for unexpected expenses like medical emergencies, car repairs or sudden travel needs. 

A good rule of thumb, according to Shirshikov, is to set aside an additional 10-20% of your annual expenses for this purpose. 

“For example, with $48,000 in annual expenses, you should aim to have an extra $4,800 to $9,600 in savings for emergencies, bringing your total to around $52,800 to $57,600,” Shirshikov said.

Account for Health Insurance and Retirement Contributions

If your current health insurance is provided by your employer, experts say you’ll need to arrange for private health insurance during your year off, which can be a significant additional cost.

Additionally, consider continuing contributions to your retirement accounts to avoid losing a year of compound growth. 

“Suppose private health insurance costs $500 per month, an additional $6,000 per year,” Shirshikov said. “If you contribute $5,000 annually to your retirement account, include this in your total savings goal.”

Build a Cushion for Inflation and Lifestyle Changes

“Inflation can erode your purchasing power, so it’s wise to include a buffer to accommodate rising prices,” Shirshikov added.

Additionally, lifestyle changes like increased travel or pursuing hobbies may increase your expenses. 

“Adding another 5-10% to your total can help cover these potential increases. For a $52,800 base amount, an additional 10% would bring your total savings goal to approximately $58,080.”

Create a Personalized Savings Plan

According to Shirshikov, to arrive at your personalized number, consider your unique situation and goals. 

“If you plan to travel extensively, your expenses may be higher.” 

Conversely, if you can cut down on certain luxuries or move to a lower-cost area, you’ll lower expenses. 

“It’s essential to tailor these guidelines to fit your specific circumstances,” Shirshikov said.

Remember–Customize Your Budget to Your Unique Needs

David L. Blain, CFA and chief executive officer at BlueSky Wealth Advisors, noted that the amount you’ll need to take a year off will depend largely on your situation and risk tolerance. 

“For example, a young single client took a year off to travel abroad with only about $25,000 in savings, covering basic costs and enjoying an adventure,” Blain said.

He added that a family of four should aim closer to $60,000 – $100,000 to maintain their lifestyle for a year. 

“It comes down to sitting down and creating a detailed budget of your current monthly costs–then add in additional expenses for healthcare, activities and travel that you anticipate during your time off,” Blain said.

The key, he emphasized, is avoiding debt. 

“Pay off high-interest credit cards and other debts before taking a break from your income. Have a cushion for unexpected costs. I also advise ‘testing the waters’ first with a shorter 3-6 month sabbatical,” Blain said.

This allows you to budget properly for a full year off and ensures you’ll enjoy an extended break. 

“You can then return to work with the confidence and experience to plan an even longer leave in the future,” Blain said. “With proper planning and savings, taking control of your career by recharging for a year can be highly rewarding. But go in with realistic expectations of what you can afford so you avoid financial stress during what should be an enjoyable life transition.”

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