Is it finally time for a change?
You've spent more than 20 years in one field—say, banking, law, or sales. You've dutifully built up equity in your home, saved a tidy sum for your kids' college tuition, and stashed away a healthy retirement fund. It's been a nice ride, but it's starting to feel like the time to pursue a passion or a dream, or give something back to the world.
Why now? Perhaps your employer dangles an enticing buyout package, or you've simply hit a dead end. Or maybe a life-changing event, such as the death of someone close to you, is a wake-up call reminding you to act on your dreams before the opportunity is gone.
Whatever your motivation, you still need to be pragmatic: For most people, a midcareer restart comes with a financial price tag. It might mean a sizable pay cut to pursue work in a more altruistic field, a hefty tuition bill for more schooling, or a temporary loss of medical and retirement benefits.
Before plunging into a more rewarding second career, it pays to make a financial plan that will allow you to stick with your goals. If you're likely to trade a good income for better work, first review your entire financial life, from everyday expenses to retirement funding. Then consider some of these money moves to set yourself up for success:
Chart a budget. If you're going to be living on less, you probably need to trim expenses. Get a clear sense of your income, debts, and savings. If you don't already have a monthly savings system, start one. Track your spending and ask what luxuries you can do without: Restaurants? Dry cleaning? Vacations? And as a rule of thumb, it's smart to have a cushion of up to six months of living expenses set aside for transition costs, as well as unexpected emergencies.
Downsize. Depending on the real estate market where you live, it might make sense to move to a smaller home, or even relocate to a cheaper town, maybe Cleveland versus New York. When Cliff Stevenson chucked his 20-year mortgage-banking career to teach social studies to eighth graders and high school students, his salary plunged to about one-sixth of what he made in his best banking years. Stevenson and his wife, Diane, have no children, and they were able to sell their Victorian home outside Pittsburgh for twice what they paid, downsizing to a smaller townhouse. Now they don't have a mortgage.
Take required courses before you quit. If possible, keep your current job while you add the education you need for your new pursuit. Many employers offer tax-free tuition assistance programs—up to $5,250, not counted as taxable income—and the contribution doesn't have to be tagged for a full-degree program. You may have to repay the funds, though, if you don't stay with the company for a certain number of years afterward.
If you're going back to school, seek financial aid. You don't need to be college-age to get a subsidized loan—there's no age limit, and you're eligible as a part-time student, too. The federal aid formulas don't take into account your home equity or retirement accounts, and, as an adult, a certain amount of your savings is protected—usually from $30,000 to $40,000—depending on your age and marital status. To apply for aid, complete the Free Application for Federal Student Aid (FAFSA) form.
While it might be tempting to borrow from your home equity, you're better off with a low-interest [www.staffordloan.com] Stafford loan. If you meet a financial needs test, the government will pay the interest for as long as you're enrolled in school. The interest is currently a fixed rate of 6.8 percent, compared with about 8 percent for a home-equity loan. Many private lenders also offer loans, though rates will be higher.
Research scholarships and grants. These, too, are available for older students, usually offered by associations, colleges, religious groups, and foundations. Try sites such as FastWeb to find what's available.
Take advantage of educational tax breaks. Depending on your income, you might qualify for the lifetime learning credit, worth up to $2,000 each year. There's no limit to the number of years you can claim the credit. If you make too much, the income ceiling is higher for claiming a deduction associated with tuition and fees, up to $4,000. There's also a maximum student loan interest deduction of $2,500. See IRS.gov or the tax benefits guide at NASFAA.org for details.