Quit work for a year: 7 steps to do it right

It's time for a break. It's something everyone thinks about on occasion, but now an increasing number of people are taking mid-career sabbaticals as a way to refresh their creativity, or to do things they've always wanted to do.Financial planners sometimes call it a "mini-retirement," in which you trade a couple of years while you're still in your 30s, 40s or 50s for working a little longer in yourThe reasons vary. Maybe you want to travel, go back to school, spend quality time with your family, volunteer or pursue your favorite hobby full time. Taking time off from work may be the only way you can follow these dreams, or just undo the damage to yourself and your family from job-related stress.Sounds great in theory, but how do you pull it off? We will leave it to you to figure out what to do on your sabbatical, but here's how you can balance your desire for time off and your desire to keep your financial goals (such as a secure retirement) on track: later years
1. A leave of absence is (usually) better than quitting outright.Unless your financial situation is very secure, and you don't need the group health insurance available through work, try for a leave of absence. (You also have the benefit of being able to borrow from your 401(k)). Understand that your employer can't keep your specific job open forever; the longer your sabbatical is, the less likely it is that you will be able to come back to your current position. Your employer may think a six-week sabbatical is terrific and will help you recharge your batteries to become a better employee; a six-month sabbatical (especially in a small company or a fast-paced one where products are brought to market very quickly) may be impossible to negotiate.2. Accept that it's going to cost you.Unless your employer offers you paid sabbatical time, you're going to have to take unpaid leave (or resign outright). Many a person has taken a sabbatical and rationalized the hit to the pocketbook with "I will be a better worker and much happier and focused, so I'll end up making much more money." That's great if it happens, but don't count on it. If anything, after a sabbatical you might decide you don't want to work as hard, or that you want to change your career to something less lucrative and more altruistic.3. Figure out how much it's going to cost you.We know this takes some of the spontaneity and fun out of the planning, but you need to know the bottom line in order to know how much time you can afford to take off. If you don't do it now, keep a detailed record of your monthly expenses for six months, subtracting out work-related costs (such as dry cleaning, lunches out, commuting costs) and adding in the extra costs of your sabbatical plans (such as travel, home renovation, and so on). Don't forget to also add in expenses that your employer pays now but that you will have to pay if you take a leave of absence or quit (such as medical expenses). Multiply your monthly basic expenses times the number of months you plan to be off work, and add in the extra costs of your sabbatical activities. Unless you will have a guaranteed job waiting for you upon your return, add at least three extra months for job hunting.4. Set goals for your sabbatical.This doesn't mean planning every day of your time off, but it does mean thinking through exactly what you want to achieve, both practically and personally.5. Figure out how much time is enough to meet those goals.Again, you don't want to sacrifice all the spontaneity in your time off, but unless your employer subsidizes you, every month you take off is going to cost you. You can plan for an open-ended sabbatical if you have a nice financial cushion and you're willing to use it, but there's a law of diminishing returns at work. For example, after six months off, the seventh month of free time is going to be less beneficial to you. At some point, the money you lose by continuing to stay out of the work force becomes more important to you than the extra free time.6. Find the money.Now that you know how much money you will need, you have to come up with it. Make a list of all of your assets, including any non-financial assets you might be willing to sell (this can be just the motivation you need to clean out your house and have the Mother of All Garage Sales). Here is a quick snapshot of the various sources of income and some quick strategies to remember with each:
If you take money out of investments, subtract the capital-gains tax you will have to pay.
If you take money out of savings, be sure you leave an emergency fund of about three months' worth of expenses in a checking or savings account; many people who have taken sabbaticals have reported that they vastly underestimated their expenses, even when they tried to plan.
You could also go for a home-equity loan, but take the loan proceeds well before you announce your plan for a sabbatical. If you are on unpaid leave, it's going to be hard to get that loan approved.
Another source is retirement plans; take loans if you can, instead of outright distributions. That's because an early distribution from your retirement plan carries a 10% penalty, plus you get taxed at ordinary income rates on the amount of money you took out. If your company will give you a leave of absence instead of making you quit, you probably can borrow from your 401(k) plan. Remember, though, that if you don't go back to that company and your employment status is terminated, your loan must be paid back to the 401(k) plan immediately.
You might decide to take a loan against the cash values of your life insurance policy, or to cash in an annuity. Before you do that, however, find out about the surrender charges. That includes any mutual funds that have back-end loads.
If your parents are making annual gifts to you already or you know they would support your desire to take time off, you can ask for a parental loan. Of course, you can ask for an advance on your inheritance, but it's probably better if you ask for a loan and let them offer on the inheritance.
If you plan to take substantial time off and you don't need a car, you might sell your car and use those funds. But before you do that, make sure you know where you will get the money to buy a replacement car when it's time to re-enter the work force. If you have taken a lot of time off, it may be hard to get a car loan before you have held onto a new job for a period of time.7. Make exit and entrance plans.When the job market is tight and employers are offering all kinds of incentives to prospective workers, you may be tempted just to quit and figure out your next job move at the end of your sabbatical. But even then, it's a bad move.To be fair to your current employer, you need to give at least three months notice if you're hoping to make it a leave of absence. This way, your temporary replacement can be trained and you make it clear that you care about your job and your employer. Even if you decide later not to come back to your current job, your supervisor will be more likely to provide a good recommendation.If we all lived life "by the numbers," we would never take vacations or sabbaticals, would never have kids and would never do anything unnecessary that costs any money. There are some things that money can't buy, and a sabbatical may be just what it takes for you to find it.Yes, you are probably going to end up with less money a year from now, five years from now and 20 years from now. The goal is for you to plan your time off in advance, make sure you can swing your finances so you don't have money worries while you are supposed to be de-stressing, and not find yourself saying, "I wish I had never taken that time off; it just wasn't worth it" at any time in the future.

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