Wealth Wise is Kiplinger’s advice column on navigating retirement-related dilemmas. Got a question? See below for how to send it to us.
Dear Wealth Wise: At 49, I have more retirement savings than I ever imagined. My IRA is worth almost $2 million, and I inherited my house, so there’s no mortgage. It’s worth almost $1 million, so the taxes on it are high. I also have $300K in investments outside of my IRA and a 6-month emergency fund.
I’m burned out and want to take a sabbatical, which my company will not support. I would have to quit and start over. I want to spend the time traveling and seeing old friends. I have several living in Europe I can stay with.
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I’m single, no kids, no pets. I’d use the $300K investment account and emergency fund to pay my bills while not working. I want to take a break of six months to a year. My usual expenses are about $100K a year and I make $200K, so I save a lot of my income. I’ll be spending more while out of work to pay for travel and health insurance.
I’m not really worried about affording the sabbatical so much as what happens next. If I can’t get back to a big salary, do I have enough in my IRA to retire on? And is there anything I’m missing in my sabbatical plan? — Wealthy But Weary
Dear Wealthy But Weary: When you’ve been working hard for more than two decades, there may come a point when you feel you need a break — and not just a long vacation, but a months-long period to recharge, pursue hobbies, and take time for yourself.
Here, we have a 49-year-old reader in great financial shape. They’re set on taking a sabbatical, even though they know it will mean starting a job search from scratch upon their return. Let’s see what our experts have to say about this plan, and what tweaks they might recommend.
You can probably swing the time off, but make sure to fund it the right way
Many people in their late 40s are scrambling to catch up on retirement savings. With an IRA worth close to $2 million, our reader is in the opposite boat. Between that and their $300,000 portfolio, they’re in a strong position to take an extended break, says Rob Burnette, investment advisor representative and professional tax preparer at Outlook Financial Center.
“For the short term, you certainly have sufficient funds for a one-year sabbatical. Using your non-IRA investment account for living expenses is very tax-efficient and doesn’t run afoul of early distribution penalties on your IRA,” he says.
However, Burnette cautions, “I would try to keep your emergency fund intact for its purpose — emergencies.”
Trevor Houston, CEO at ClearPath Wealth Strategies, LLC, agrees.
“My advice is to set up a separate savings account dedicated to covering expenses during an intentional career break. Don’t start raiding retirement accounts or building debt. This fund should be separate from the emergency fund. A planned career break is not an emergency,” he says.
Houston also emphasizes the importance of planning for extra costs during a workforce break.
“The biggest mistake I see people make when planning a career sabbatical is assuming they only need to replace their regular paycheck,” he says. “Unfortunately, things like health insurance, taxes, inflation … can end up totaling more than people may expect.”
Before moving forward with a sabbatical, Houston recommends mapping out the costs, including surprise expenses that may arise, like home repairs. If your budget can support unplanned costs, you should be in good shape.
And speaking of home repairs, Mike Dunlop, CFP and co-founder at Ignite Financial, says that as a homeowner, you have an opportunity to help fund your sabbatical without raiding your investment account too heavily.
“I’d also at least have them look at that $1 million paid-off house sitting empty with a big property tax bill while they’re in Europe. Renting it out might cover a good chunk of the trip,” he says.
The only catch? Rental income will boost your modified adjusted gross income (MAGI), which could bump up your premiums for marketplace healthcare.
Your sabbatical year could be a good tax-planning opportunity
Giving up your paycheck for a year may be daunting. But it could actually serve as an opportunity to make a smart long-term tax-planning decision.
“While you have a large IRA, that is also a tax bomb that will go off when you do draw funds from it in retirement. For full tax diversity, you need to add a Roth IRA to your mix so that you have everything covered,” Burnette explains.
“During the year on sabbatical,” he continues, “you could look at doing some Roth conversions on your IRA while you aren’t drawing a large salary. The Roth conversion would certainly improve the status of making your $2 million in retirement assets go further when you finally retire.”
Dunlop agrees that a Roth conversion could be a smart move during a planned sabbatical. But he also cautions that a conversion could lead to higher health insurance costs.
“I’d want them watching the health insurance piece, because ACA coverage can be cheap when income’s low,” he says. “But a Roth conversion bumps that income up and can shrink the subsidy, so those two levers work against each other.”
Make sure you have a re-entry strategy
If you take a sabbatical at 49 and return to the workforce at 50, you may not be nearly ready to retire. Houston says it’s important to plan for a re-entry that may take longer than anticipated.
“What happens if it takes longer than you expect and your sabbatical savings are gone? What’s happening in your industry? How might you need to adjust your career plans?” Houston says.
Dunlop says that at your age, there’s some risk of age discrimination working against you.
“The over-50 job market is real, and I won’t pretend otherwise,” he says.
However, Dunlop insists you have one thing going for you: You don’t necessarily need to replace your $200,000 salary if you only spend $100,000 a year and have a robust IRA to fall back on. And trying to find a job is less scary when you can accept a lower number.
“The next job really only has to cover what they actually spend,” Dunlop insists. “When you don’t need the paycheck, you can usually interview better and hold out for something you actually want.”
Enjoy your time off
So there you have it. Our three experts agree that you’re in a great position to take a much-deserved sabbatical. Even if you end up in a lower-paying job upon your return, you’ve built up a large enough IRA balance that you can let that money sit and grow until retirement age and still have more than enough.
If you want to approach that career break with even more confidence, it could pay to consult a professional.
“This would be a great conversation to have with a financial planner that will look at all aspects of your financial situation,” Burnette says.
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our writers and experts, in this advice column, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial adviser regarding any questions you may have in relation to the matters discussed in this article.