Career breaks are a common occurrence for many women, often taken to raise children, care for elderly family members, or pursue personal interests. While these breaks can be fulfilling, they can also disrupt financial stability. To ensure a smooth transition back into the workforce and maintain financial security, it’s crucial to have a solid financial plan in place.
Understanding the Challenges
a. Income Disruption:
Reduced or no income during a career break can significantly impact savings and investments. For instance, a woman who was earning a comfortable Rs. 50,000 per month may find herself in a financially vulnerable position during a career break, needing to rely on her father or spouse for financial support.
b. Increased Expenses:
Childcare costs, healthcare expenses, and other family obligations can strain the budget. A single mother’s financial burden can be substantial, particularly when she has to balance childcare responsibilities with her career break. Childcare and schooling expenses can significantly eat into her savings and income, making it challenging to deal with her career break.
c. Reduction of Retirement savings:
Career breaks can reduce retirement benefits in the long run. A woman who takes a five-year break from work may experience a substantial decrease in her retirement corpus due to a lack of contributions to retirement accounts like EPF, PPF, and NPS. Additionally, she might be compelled to withdraw from her existing savings to meet financial obligations during this period, further depleting her retirement fund.
Here’s an example of how a career break can impact retirement savings :
Reeta starts working at age 25, earning Rs. 50,000 per month. She plans to retire at age 60, assuming a 35-year career. She contributes 12% of her salary to EPF (employer + employee contributions). Expected annual return on investments: 8% (conservative estimate)
Scenario 1: No Career Break
- Total EPF contributions over 35 years: Rs. 46.8 lakhs
- Assuming the corpus grows at 8% annually, her retirement corpus would be approximately Rs. 3.3 crores.
Scenario 2: 5-Year Career Break
- 5 years of missed contributions: Rs. 36 lakhs
- Assuming she returns to work with the same salary, her total EPF contributions would be Rs. 30.6 lakhs.
- With the same 8% annual growth, her retirement corpus would be around Rs. 1.6 crores.
Impact:
- The 5-year break reduces her retirement corpus by Rs. 1.7 crores (approximately 50%).
- This gap becomes even larger if she withdraws from existing savings during the break.
| Scenario | No Career Break | 5-Year Career Break |
| Total EPF Contributions | Rs. 46.8 Lakhs | Rs. 30.6 Lakhs |
| Retirement Corpus | Rs. 3.3 Crores | Rs. 1.6 Crores |
| Impact of Career Break | – | Rs. 1.7 Crores (50% reduction) |
Additional Considerations:
- Lost salary and career progression during the break.
- Reduced retirement benefits due to fewer contribution years.
- Higher inflation during retirement years erodes the purchasing power of her savings.
Strategies to Mitigate the Impact:
- Start saving early and consistently, even in small amounts.
- Consider alternative investment options like PPF or mutual funds.
- Seek out flexible work arrangements after the break to maintain contributions.
- Upskill during the break to enhance earning potential upon return.
Essential Financial Strategies
1. Build a Robust Emergency Fund:
A well-prepared emergency fund is crucial for a smooth and stress-free career break. Here’s a step-by-step guide:
a. Assess Your Financial Needs:
- Duration of Break: Clearly define the length of your planned break.
- Monthly Expenses: Create a detailed budget, accounting for: Rent payments, Utilities (electricity, water, gas), Groceries, Transportation, Insurance premiums, Debt repayments and Other regular expenses
- Unexpected Costs: Consider potential emergencies: Medical expenses, home repairs, Vehicle breakdowns
b. Calculate Your Fund Requirement:
- Multiply Monthly Expenses: Multiply your monthly expenses by the number of months you’ll be on break.
- Add a Buffer: Include an additional 20-30% to cover unforeseen costs.
c. Parking Your Emergency Fund:
Prioritize capital preservation and liquidity when investing your emergency fund. Here are some suitable options: High Yield Savings account balance, Fixed deposits, short term debt Mutual funds etc..
Refer the blog to know more about the various instruments to park your emergency fund
d. Financial Needs Assessment:
Let us Meet Reeta who is in her late 20s, working in a tech company in Bengaluru plans to take a 6-month career break.
Step 1. Duration of Break: 6 months of career break
Step 2. Monthly Expenses:
Fixed Expenses:
- Rent: Rs. 15,000
- Utilities (electricity, water, gas): Rs. 3,000
- EMI for personal loan: Rs. 5,000
- Groceries: Rs. 8,000
Variable Expenses:
- Transportation: Rs. 3,000
- Mobile and Internet: Rs. 2,000
- Childcare Rs. 8,000
- Miscellaneous (entertainment, dining out, etc.): Rs. 5,000
Total Monthly Expenses: Rs. 54,000
Step 3. Unexpected Costs:
Medical Emergencies: A contingency fund of Rs. 1,00,000.
Home Repairs: A buffer of Rs. 20,000.
Step 4. Calculating the Fund Requirement:
Total Fund Required: 54,000 * 6 = Rs. 3,24,000
Adding a 20% Buffer: 3,24,000 * 1.2 = Rs. 3,88,800
Unexpected costs: 1,20,000
Therefore, Reeta needs to save around Rs. 5,08,800 to cover her expenses during the 6-month career break
Reeta can Park a portion of the fund in a liquid investment like a high-interest rate savings account or a liquid mutual fund and can Invest the remaining amount in safer debt mutual funds or bank Fixed deposits to grow the corpus for future needs.
2. Protect Yourself with Insurance:
- Health Insurance: Health insurance is crucial during a career break, especially for women, as it provides a financial safety net for potential medical expenses, particularly during pregnancy and childcare.
- Critical Illness Insurance: Offers a lump sum payout to cover out of hospital expenses and loss of income due to critical illnesses.
3. Maintain Financial Discipline:
- Budgeting: Create a detailed budget to track income and expenses. Refer the blog to know more on budgeting
- Preserving Your Emergency Fund: Avoid Huge purchases which may deplete your emergency fund.
- Reduce Discretionary spends: Prioritize essential spending and minimize discretionary purchases to protect your financial safety net.
- Become Debt Free: Prioritize repaying high interest debt to avoid accumulating interest.
- Regular Reviews: Periodically review your financial plan to make necessary adjustments.
4. Plan for a Smooth Return to Work:
- Upskilling and Reskilling: Stay up-to-date with industry trends and continuously upgrade your skills. Leverage online platforms like Coursera, Udemy, or LinkedIn Learning to gain new skills or enhance existing ones. Consider obtaining relevant certifications to strengthen your professional profile and increase your market value.
- Networking: Maintain connections with former colleagues, mentors, and industry professionals through social media, email, or in-person meetings. Attend conferences, webinars, and workshops to expand your network and stay informed about emerging opportunities. Joining industry-specific organizations can provide valuable networking opportunities and access to resources.
- Flexible Work Arrangements: Consider gradual re-entry into the workforce through part-time positions. Explore freelancing opportunities to gain experience and build a client base. Remote work options can help you balance work and personal commitments. If you have specialized knowledge, consider offering consulting services.
Navigating a career break can be a rewarding experience. To ensure a smooth transition and emerge financially stronger, consider consulting with a financial planner. Remember, financial planning is an ongoing process. Stay informed, adapt to changing circumstances, and prioritize your financial well-being.
