Ask the expert: Can I afford a gap year in my 40s?
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Fidelity personal finance specialist Marianna Hunt is back to advise a reader who wishes to take a year off for travel but worries about disrupting long term savings plans.
Q: I’m in my early 40s and have been working in the same company since my early 20s. I desperately need a change so want to quit my job and take a year out to travel (something I never did when I was younger).
I’ve saved £40,000 to do it, which I think should cover my costs. But I’m very conscious that your 40s are when most people double down on saving for retirement.
Is this a bad idea? And how can I make sure the gap year doesn’t damage my finances long-term?
A: This is big, exciting step. Quitting a job in your 40s can be scary, but if you don’t do it, you may well look back on that decision later with regret.
We don’t know what our health will be like in future. If you deprive yourself of opportunities like this today in the hope that you’ll spend your retirement travelling, you may be disappointed.
Your budget of £40,000 for the gap year sounds reasonable, although that depends on how many flights you plan to take, how expensive your destinations are, and how luxuriously you want to travel.
A long-haul flight every two months could easily set you back £5,000 over the year. Rental apartments in major cities could well cost another £1,000-£2,000 per month. That’s already more than half of your budget gone before you factor in food, local transport and activities.
However, if you’re only taking a couple of long-haul flights and staying in cheaper places, like Southeast Asia or South America, you should be well within budget.
It’s important to have some sort of plan for how you want to spend that money so you’re not having to miss out on experiences towards the end of the trip.
Looking long-term
Now, let’s look at the long-term plan.
Is this £40,000 your only savings? If so, you are entirely depleting your emergency fund for this trip. That is not an ideal plan: what if you struggle to find work immediately after returning?
Ideally you should have three to six months’ worth of your normal expenditure in an emergency fund for when you get back. If you don’t have this safety net, could you delay your trip by a couple of months while you build it up?
You’re right that most people save hardest into their pension in their 40s/50s, and a year of missed contributions will be costly later.
Let’s assume for neatness that you are 45 and earning £45,000. A year out of work means you could be forgoing £3,600 of pension contributions. That assumes you and your employer are contributing a combined eight per cent of your gross earnings.
But you are also forgoing any potential future growth on those missed investments. By age 67 (your assumed state pension age), £3,600 could have grown to around £10,500, if you achieved an average return of five per cent a year after fees.
If you’re worried your pension savings aren’t on track, it may well be worth thinking about making those contributions anyway. Conveniently, you can contribute up to £2,880 per year into a pension even if you have no earnings, and the government will top it up to £3,600.
Spending £37,120 as opposed to £40,000 on your trip (and funnelling the rest into your pension) is unlikely to make a material difference.
However, if you anticipate going back to work after the trip, especially if you are likely to work for an employer with a generous pension matching scheme, you may be better off waiting to make up those missed contributions.
Paying extra into your pension will be much more lucrative if your employer will match what you put in. It’s even more beneficial if you are a higher rate taxpayer while doing so, as you’ll get more generous government top-ups.
Property and pensions
One question to consider is whether you own a property and what you plan to do with it. If you rent it out during your trip, any extra income earned after covering your costs could be put into a pension and/or stocks and shares ISA.
Remember, though, that the biggest financial risk isn’t the pension contributions you miss: it’s how quickly and at what salary you return to work.
It’s also worth checking whether taking a year out would affect your National Insurance record for the State Pension. If you don’t qualify for credits, you may wish to consider paying voluntary contributions.
Budgeting for the trip is a good nudge to get your long-term finances in order. Check whether you’re on track for the retirement you want, what income your savings may pay you in future, and consider adjustments if that’s not going to be enough.
Ultimately, though, your money is there to enable a life well lived, not to be preserved at all costs.
A year out in your 40s won’t ruin a well-constructed financial strategy, but it does require planning. If you protect your emergency fund, understand the pension impact, and have a realistic re-entry strategy, the numbers can be managed.
Saving diligently doesn’t just fund life at 67. It gives you options, including the possibility of more “mini-retirements” later on.
Please remember that this is not financial advice. Every person’s situation is unique, and, in many cases, it would be valuable to speak to a qualified financial adviser.