Smart Money Tips

What’s a Sabbatical? Is it Right for You?

Sometimes you just need a break. A sabbatical from work might seem like a major step back in your career progression, but it can feature long-term benefits that can actually boost your well-being and improve your performance on the job. Time spent with family or simply focused on recharging your batteries can also make you realign your priorities for the better. 

The best approach is not to stress over the negatives that come with stepping back from work for a time. Rather, the task at hand is to figure out what fits best for a client’s life and family, then financially plan for that. Think of sabbatical planning as a home improvement project – we draw up blueprints with this primary question in mind: “How do we make this happen?” By setting a few goals and with some prep work, a sabbatical might turn out to be a win for you both mentally and financially.

What Is a Sabbatical?

A sabbatical is just a break from work beyond your typical PTO. While a two-week vacation is something we all need sometimes (and it seems Americans are leaving more and more PTO days on the table each year as our collective mental fatigue only worsens), a sabbatical might range from a month to up to a year. 

During an employment hiatus, folks devote time in various ways, but often a focus on the family is the primary mission while others – perhaps young Gen Zers or empty-nesters – might seek to travel the world to absorb awe-inspiring experiences. Whatever the reason, escaping the 9-to-5 grind, 40-hour work week, and pressing on until your retirement date through a sabbatical may be the right move for you.

Derived from the Greek word sabatikos, meaning “of the Sabbath,” a day of rest that happens every seventh day, a gap from employment seems to be an emerging trend as the notion of so-called ‘mini retirements’ throughout someone’s career gains steam. Also, with more remote options these days, flexibility for deviations from traditional work arrangements has people thinking outside the box. Before you make the leap – blazing into your boss’s office to request a 1-year hiatus – be sure to consider the financial aspects of such a bold move. 

Financial Peace of Mind Through Planning

Being a financial planner, I like to look at the data. It turns out that extended time away from your career to recharge, retool, and rediscover yourself does not have to come with the negative offset of a significantly delayed retirement if planned the right way. The financial peace of mind that comes with knowing your short- and long-term goals are still on track – even when you might not have paychecks hitting your checking account – makes stepping to the sidelines easier. 

Figure Out the ‘Why’

Before you dive headfirst into a sabbatical, you should first carefully determine its purpose and goals for your situation. Is it simply burnout from your job that has you seeking a way out? If so, that’s quite common in today’s go-go world at the office and at home. Or are you more worried about one day regretting things you did not do in life? 

This first step is sort of like kicking your feet up on the psychologist’s couch to uncover an underlying issue. You can even create a sabbatical ‘mission statement’ to better outline your objectives. Once you have a firmer understanding of why you feel a need for a prolonged break, then you can take the next step (which could be a roadblock – read on). 

Sabbaticals Are a New Thing For Corporate Professionals

It turns out that only 12% of employers allow unpaid sabbaticals while just one in 20 offer it as a paid benefit, according to a 2017 study. This is something new to the American hustle culture, but I think more firms will warm up to the idea as time goes on. 

So, your employer might not even let you step back from your job. It’s also possible that a little negotiation will result in flexibility – the last thing a growing company wants is to lose key talent since they experienced plenty of that during the ‘Great Resignation’ from 2020 through 2022. You can frame your sabbatical as a win for your team at work since you can train a colleague to learn new skills. The main thing here is that coordinating with your employer is critical. 

Crunching the Numbers

Once you have your mission statement penned and have teamed with your boss to get the ‘OK’ on your sabbatical, our job of financial planning begins. We can run projections on the usual cash inflows and outflows and what all money changes resulting from work life to sabbatical life. This helps calculate the true cost of not having a paycheck. The assessment allows us to figure out near-term goals that must be hit so risks are minimized. 

While it’s impossible to know in advance all the variables and range of outcomes, being vaguely right about the future is better than having no plan at all. In my experience, sabbaticals do not push out a target retirement date by all that much, so they are actually not only affordable but have the potential to be a lucrative investment compared to a tailspin burnout on the job.

Back to Basics with a Budget

Budgeting for a sabbatical must include a projection of fixed, variable, and new costs. Travel expenses might be higher, eating out could cost you more, and you could be without health insurance during your absence from work. Those cash outlays would be largely in addition to existing expenditures. 

Does that make your heart beat a little faster? Don’t sweat it. This is why we plan! Developing a near-term savings playbook helps us get to the goal line. Similar to building an emergency fund, we can start a mental account to beef up sabbatical savings. Tactics include reducing 401(k) contributions, temporarily halting making new taxable investments, and simply living leaner for a period before and even after the sabbatical. Importantly, contributing to the match in your 401(k) and making Health Savings Account (HSA) contributions remains imperative.

Taking Advantage of Low Tax Brackets

It’s time to nerd out on taxes. Let’s say you said sayonara to your job for 12 months. That means you might have two calendar years in which taxable income is low. That opens doors for tax-winning plays such as Roth conversions, selling appreciated stock at a 0% capital gains rate, and deferring income from a high-tax year into a low-tax year. Believe it or not, a married couple can save on the order of $20,000 in taxes during the sabbatical.

Non-Financial Benefits and Strategies

Also from a planning perspective, just talking about rearranging your work-life balance and putting thoughts to paper (and a spreadsheet of course) leads individuals and couples to get introspective on what truly matters to them. It’s not just a career thing. It’s a life thing. I’m reminded of George Kinder’s three financial life planning questions that all have to do with freeing your mind to figure out your purpose in the now, in the near future, and over the long haul. 

More tangibly, by probing your employer about a months-long break, you might find they are more flexible and caring about your mental health than you had realized. Still, some companies are more cold-hearted, and you could find yourself starting fresh with a new job if the answer is ‘no’ after talking (maybe pleading) with your boss and HR department. 

More broadly, going through several “what if” scenarios helps ensure successful outcomes to your sabbatical – I have seen couples fret over lost income and the prospect of losing skills, leading to having to land a new job. Openly discussing these concerns is crucial.

One more tip for those who want to get away through travel: Teaming with a travel agent can better detail itineraries which makes the financial advisor’s job of fine-tuning a budget easier. 

If a break from work has been on your heart and mind lately, let’s talk about it. We can find out if a sabbatical could be right for you. Just chatting about the topic helps put life and your career in a better perspective. While stocks and bonds are important for your long-term plan, an investment in your mental health and just experiencing life in new ways can pay big dividends.