How to Financially Prepare for Changing My Job?
(Five minute read time)
Canadians, on average, have 15 different jobs in their lifetime. Is it time you enter a new chapter in your professional journey? Before making the final leap, you should review your financial situation. In this article, we'll delve into the personal financial considerations you should prepare for, such as retirement planning, life insurance, and crucial considerations for those approaching mortgage renewal - to ensure a smooth transition to the next chapter of your professional journey.
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Navigating Retirement Planning During Career Changes
A pension is a retirement fund that you contribute to during your working years, and from which you receive regular payments after you retire. There are various types of pensions, such as vested versus non-vested and locked-in versus non-locked-in. To find more information about your pension, log into your My Service Canada Account (MSCA).
Pensions: Vested vs Non-Vested & Locked-In vs Non-Locked-In
Vested Pension: When your pension is vested, you have met the eligibility requirements to claim it, typically based on years of service with your employer. You are entitled to the full benefits of the pension once you reach retirement age or satisfy other criteria.
Non-Vested Pension: A non-vested pension means you haven't met the criteria for full entitlement. This could be due to not completing the required years of service. The implication for non-vested pensions is you may not be eligible for the full pension benefits. Understanding vesting rules is crucial to making informed decisions about your retirement.
Locked-In Pension: When your pension is locked in, there are restrictions on withdrawing the funds in cash. The money is typically earmarked for retirement income, ensuring financial security during your retirement years. Locked-in status is designed to safeguard pension funds for retirement, preventing premature withdrawals. Funds are often transferred to a Locked-In Retirement Account (LIRA).
Non-Locked-In Pension: A non-locked-in pension allows for more flexibility, often permitting cash withdrawals or transfers to a regular retirement savings account. You may have more control over how you access the funds. However, it's essential to consider the long-term implications and potential tax consequences.
What Happens If My Pension is Locked-In?
If your pension is locked in, the funds are typically transferred to a Locked-In Retirement Account (LIRA), also known as a Locked-In RRSP (Registered Retirement Savings Plan). LIRA funds are invested, and withdrawals are restricted until retirement. At retirement, you can convert the LIRA into a Life Income Fund (LIF) or annuity to provide a steady income stream.
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How to Keep Life Insurance Between Career Transitions
Depending on your life insurance plan, your life insurance may change if you change employment. If you only have life insurance provided by your work (group life insurance), it will end as soon as you leave your job. It may be a good time to learn more about life insurance options. In our article Is My Work Insurance Enough? we break down the advantages and disadvantages of only having life insurance provided by work.
If you seek to qualify for private life insurance, there are a few factors insurers consider to determine eligibility, such as:
Age: Generally, the younger you are, the more affordable your premiums will be.
Health: Has there been a recent diagnosis? Insurers will look at your medical history to determine your eligibility and the cost of your premiums.
Family History: Are there hereditary conditions that run in the family? This could impact the risk assessment.
To learn more about the various types of life insurance, check out our article: What Types of Life Insurance Is Best?
How Much Would Similar Life Insurance Coverage Cost?
After assessing your current life insurance provided at work, get a quote on private life insurance to compare how much similar life insurance coverage would cost. Private life insurance offers a personalized approach, taking into account your specific needs, health status, and financial goals. A big advantage of private life insurance is that the plan does not have to change during your transition to different workplaces, ultimately providing more security for you and your loved ones.
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Preparing Your Mortgage For a Career Change
The main goal in considering your mortgage during a career change is to ensure that you are not limiting your mortgage options. Considering your mortgage in your career change plan is especially crucial during the mortgage renewal and refinancing periods.
You may be asking yourself “How much time do I need at a new job before I can apply for a mortgage switch?” The answer to this depends on how predictable your income will be in your new job. If your new job is salary OR guaranteed hours, you must be off probation. The probation period typically lasts for the first three months of new employment. However, if your new job is hourly, flexible hours, or commission, typically a two-year average income is needed.
Compare the two scenarios in each situation below:
If You’re Planning to Move or Make a Change to Your Mortgage:
If you are thinking of moving, planning to get access to your equity, or making any other change to the mortgage, then you’ll need to submit a mortgage application. In this case, the timing is very important.
The best option is to change your mortgage first, then change your job. Make this change before you give notice to your employer, and then make sure your new mortgage is in place before you make the career change.
Your new lender will need income confirmation for the new mortgage, and there are certain kinds of income they can and cannot accept. They may not use your income if it does not meet their criteria.
If you need to make the career change before your next mortgage application, then here are key insights on how your lender will look at your income:
Salary OR Hourly With Guaranteed Hours: if your company pays you an annual salary or if your hours are the same every week, and your company will provide a letter of employment, then you can apply for your mortgage even on probation, as long as it closes after the probationary period. Be careful, because any additional bonuses or overtime on top of your guaranteed pay will not be counted unless it is also guaranteed paid.
Flexible Hours/Commission/Other: if your income is flexible, i.e. hours that change, commission-based paid, dividends, bonus, overtime, then your lender will need to see two years of history in most cases, to allow this income on the application. If you are not sure which one is yours, ask your mortgage broker.
“The best option is to change your mortgage first, then change your job.”
If Your Mortgage Renewal is Approaching:
Try to plan your job change after the renewal. this way you preserve your right to choose and you maintain all your options with different banks. If you do this, you can avoid being stuck with an offer from your current lender that is not competitive. To learn more on mortgage renewal, and how to prepare, check out our article, How to Avoid Mortgage Rate Renewal Shock.
If you are unable to change your job before the renewal, in most cases the lender will offer to renew your mortgage without a new application. This is an easy and quick way to get through the process, but you will limit your choices and you could be at risk if your lender does not renew automatically. You will be stuck with whatever rate and terms are available at your current lender. You may be locked in without the ability to change for years.
Overall, it’s recommended to give yourself lots of time to plan and talk to your mortgage broker in advance. A mortgage broker is not a bank employee, a consultation will not have no affecting impact on your existing mortgage.
Conclusion
As you embark on the exciting transition to a new professional chapter, remember that proactive planning lays the foundation for a secure and flourishing future. Whether it's orchestrating a retirement plan that aligns with your goals, reassessing your life insurance, or contemplating a mortgage renewal, these financial decisions significantly impact your journey ahead. By staying informed, seeking professional advice, and taking deliberate steps toward financial preparedness, you empower yourself to embrace new opportunities with confidence.
If you have further questions or need personalized advice, WealthTrack is here to support you on this financial journey.
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