What Leaving the Workforce Means for Your Portfolio

Women have left the workforce in droves. Nearly three million American women have left the labor force over the past year. 

Before the pandemic, women consisted of more than 50% of the country's workforce, though mothers of young children have been furloughed or laid off or have had to choose between working and caring for their kids.

Two out of every three American children under the age of five need child care because both parents work. The cost: $18,000 a year, almost 30% of families’ net income, according to the Organization for Economic Cooperation and Development.

But the thing is, this isn't a woman's issue. Anyone could decide to leave their jobs. Traders, you may have it in your head that you'd like to quit and trade full time. Developers, you may have always dreamed of dropping everything and freelancing.

Before you take the big leap, calculate what leaving your job — yes, that job you love! — could mean for your current portfolio and long-term wealth.

Loss of Income

What do you lose from leaving the workforce? Obviously, it's your current salary multiplied by the number of years you take off — as a starting point. But that doesn't consider your potential wage growth or lost retirement savings and benefits.

According to American Progress, let's say a woman earns the median salary for younger full-time workers ($30,253 annually in 2014). She takes five years off to care for a child at age 26. She could lose $467,000 over her working career and reduce her lifetime earnings by 19%. 

On the other hand, let's say a man did the same thing at age 26. Let's say he earned the median wage for young male workers ($33,278 annually). According to American Progress, he would lose $596,000 over the course of his career and would see a 22% decrease in his lifetime earnings.

Loss of Income Hikes

Let's say you leave the workforce with a $60,000 salary at age 25. You wouldn't just leave $300,000 on the table over five years, you'd also lose out on income hikes as well. For example, let's say you're slated to get a 5% increase in your salary every year. 

Over the course of five years, you'd earn (and lose out on) the following: 

Year 1: $63,000

Year 2: $66,150

Year 3: $68,135

Year 4: $71,541

Year 5: $75,118

If you changed jobs or elevated your position, you'd lose out on even more. 

Loss of Retirement Benefits

The loss of an employer match might also tremendously damage your portfolio. Consider the growth you could achieve over even just five lost years, with your contributions and your employer's contributions, combined. 

Let's say your employer kicks in 3% of your salary as soon as you put the required money into your account. This means you'd miss out on the following amounts from your employer and your contributions (assuming you contributed 10%), based on the salary totals listed above: 

Year 1: $63,000 plus total retirement contributions of $8,190

Year 2: $66,150 plus total retirement contributions of $8,599.50

Year 3: $68,135 plus total retirement contributions of $8,857.55

Year 4: $71,541 plus total retirement contributions of $9,300.33

Year 5: $75,118 plus total retirement contributions of $9,765.34

Year 1 total loss: $71,290

Year 2 total loss: $74,749.50

Year 3 total loss: $76,992.55

Year 4 total loss: $80,841.33

Year 5 total loss: $84,883.34

Total loss of income (with retirement benefits): $388,756.72

Loss of Compounding on Retirement Benefits

Not only will you lose out on the straightforward amounts with your retirement benefits, you will also lose out on the compounding that occurs when your money stays in the market for a long time.

Let's take the total figure for the full amount of retirement contributions above and add it up. It adds up to $44,712.72. At 8% interest compounded over 30 years, you'd lose out on a whopping $449,928.76 — and this is if you never added another penny to that amount ever again. (Isn't that a crazy amount?)

Know How Much You Stand to Lose if You Bow Out

Sometimes it's important to put all the numbers on the table so you can visually see them, especially when you're going to make a major decision like quitting your job.

You can pretty quickly tally up what that five years out of the workforce could mean you'd lose out on around $400,000, give or take. It's important to give yourself tools that fit your situation. Calculate how much you earn after taxes, consider the automatic money that goes into your 401(k) and how much your employer currently kicks in. Figure out the numbers you need to know before you ever seriously consider bowing out.

Checklist Before You Quit: Beef Up Your Emergency Fund and Make a Plan to Save for Retirement

You might get sick of reading about "having an emergency fund" but it is so vital. In the midst of quitting your job, your son might catapult down the steps and knock out his two front teeth. Your daughter might need an emergency appendectomy. (And if you think these things sound pretty specific, yes, I've learned from people who had these things happen to them, and yes, they needed to dip into their emergency funds.)

An emergency fund should cover three to six months’ worth of living expenses, so if you need $5,000 per month, you should have $30,000, plus additional money from quitting your job. 

Furthermore, put together a plan to save for retirement when you leave your job, particularly if you plan to become self-employed.