Whether it’s packing up the family and doing a road trip around Australia, taking some time off to focus on your postgraduate studies, or just recharging the batteries with a few months on the Greek Islands, some sort of mid-career sabbatical is on the agenda for many of the people that we work with.
In this week’s episode I want to explore some of the planning actions you can take to help make this goal achievable.
Thanks for listening to another episode of the Financial Autonomy podcast let’s jump into this week’s episode, planning for a sabbatical
Income & Expenses
Sabbatical planning in a financial sense is an income and expense problem. You’re taking a break from your normal work, so income likely deceases, often ceasing entirely. Therefore a key element of the planning is what will your expenses be over this time frame? If you don’t already have a good sense of what you currently spend per month, determining this number is the essential first step in devising a strategy to make your sabbatical achievable. In the Financial Autonomy book there are several different cash flow strategies that you might find useful. There’s also a good budgeting tool on the Moneysmart government website.
Once you’re clear on what your current expenditure is, we then need to create a revised version for what it will become during your sabbatical. For some people, expenses decline as they have less commuting, more meals at home, and just an all round simpler life. But for those with travel plans, expenses will likely rise. Everyone’s different, but you need to get clear on how much you need per month to make this sabbatical viable.
Once you have the expenses question answered, we turn to income. Sometimes people have long service leave or at least some annual leave they can use to cover part of the need. It’s not uncommon though for us to see people finish up in a role, especially contract workers where there is no accumulation of leave. And so the sabbatical is a period between paid work, and therefore there is no employment income.
Your income solution could be a combination of several different cash flows. For instance it could be that the first few months of your sabbatical are funded by leave payments, and then the reminder via drawings on your savings. For those with a mortgage, drawing from your offset account or redraw is the most common approach. If you’re debt free, then you’ve likely got some cash savings, and perhaps some investments you can draw upon too.
If you’ve built up a non-super investment portfolio on a platform like Netwealth, you may be able to establish a regular withdrawal plan to help fund your sabbatical living costs. In comparison to simply taking your dividends, the regular withdrawal plan has two key advantages. One is that the payments are monthly whereas dividends and distributions are usually either six monthly or quarterly. The second benefit is that the amount is fixed and stable each month, much better for meeting ongoing expenses than the normal lumpiness of dividends and distributions.
With your monthly expenditure needs quantified, and visibility on what income you have available to you during that time, you need to identify whether there is a shortfall. If so, it’s now a matter of developing a savings plan bridge that gap.
I’m sure you’ll have no trouble with the maths, but for instance if you determined that you needed an additional $20,000 in order to cover your expenses whilst on your sabbatical, and your planned break is 10 months away, then you need to be setting aside $2,000 a month between now and then to make this work. With that sort of timeframe, you wouldn’t typically invest these monies. Simply accumulate cash in the bank. If your sabbatical is 3+ years away, building up your savings in an investment is something that could be explored.
You also need to think ahead to what happens at the end of your break. If you don’t have an immediate role to go back to, so either you’ve quit your job to take this sabbatical or you’re a contractor who’s taken a break once a contract concluded, then you also need to ensure you have sufficient resources is to cover a period of time for you to find a new role. Ideally, if your expectation is for instance that you would find a new role within three months, then you would have enough savings to support yourself for double this. Just to give yourself a safe buffer.
We’ve talked about covering your living expenses whilst on your break, but it could also be that your sabbatical requires a lump sum to make it happen. Perhaps the purchase of a caravan, air fares, or tuition fees. Again, determine the amount, divide that by the number of months between now and your planned sabbatical, and then assess whether you can realistically save that amount per month between now and then. If the answer is no, then you would need to consider pushing back your plans.
Timing to minimise tax
The timing of your sabbatical is likely not driven by financial considerations, but where you do have some flexibility on this, consider the tax implications across financial years. If for instance you planned on taking 12 months off, it would be more tax effective to have half in one financial year and half in another, compared to taking the entire period of leave in a single financial year. This is because, by spreading your leave across two years you get the benefit of two tax free thresolds on the income earned prior to and upon return from your break. So to put that into more human terms, you will likely get a better tax outcome if you took a calendar year off, January through December, rather than a financial year – July to June.
Long term impacts
When we’re helping clients plan for a sabbatical another piece of the puzzle is to help them understand the long term impacts off this break. With no superannuation contributions for the time out of the workforce, how detrimental is that to retirement savings? We model this and identify whether the sabbatical will necessitate them working longer than previously planned. It need not always be the case, however in my experience those looking to have this type of career break are typically those planning to work later into life. There’s pretty much two distinct camps, either the retire as early as possible crowd, or the long term career with breaks along the way crowd. You guys know that I’m personally very much in the later of those two groups, but both have their attractions.
As we live longer, the trend is towards working longer. A 40 year plus working life is not at all uncommon. Taking some longer breaks across this journey can help in avoiding burnout, replenish your motivation, and provide an opportunity to see the forest for the trees, to step back and reflect on whether the path you’re on is the path you wish to continue to be on.
Sabbaticals, career breaks, mini retirements, whatever you want to call them, this idea of a three months plus break in your career is something likely to gain more and more traction. As canvassed many times in past episodes, the traditional approach of head down bum up until your mid 60s and then be able to relax and enjoy life is a flawed model. It’s too dependent on health outcomes and too limiting in time span. White water rafting down the Franklin River, or trekking in Nepal, simply might not be feasible in your 70s.
If you haven’t already got a sabbatical planned, why don’t you roll it around in the head over the next few days and consider how you might make it work. If it is something that appeals to you, hopefully the ideas in this episode will help you solve the financial piece of the equation. Now you’ve just got to figure out who’s going to look after the pets while you’re gone!Back to All News