When people quit a high-paying job to pursue a passion career, or quit traditional employment to start a business, or retire early, they can be met with many questions regarding the potential risk of these moves.
Some people don’t understand how one could take such a risk when they have a good thing going. Questions that may be asked include “what if the business doesn’t generate enough revenue?” Or, “what about inflation (or low future returns, or Japan!?)”.
For those that are planners at heart, it can be hard to make the changes to one’s life as noted above. Sometimes the potential risks can outweigh the benefits of making a positive life change, and the skepticism of friends and family can add to the doubt.
When making a life change that can potentially have a large financial impact, it is imperative to have a good financial plan. For example, when taking a new lower paying job, ensure the new income and your budget are aligned. When starting a new business, make sure that you have enough cash set aside to last until the business will make enough revenue to cover your personal expenses. When retiring early, make sure your withdrawal strategy is not too aggressive.
There will always be risks in making a change that could potentially have a negative impact on your finances. There are even risks to taking a higher paying job – it could be cyclical; or retiring at 65 – maybe the retiree’s investment portfolio is extremely susceptible to inflation risk at 100% cash.
Risks aren’t always bad. Taking a risk can lead to a very profitable business or a fulfilling job you are passionate about. Having a thorough and well thought out financial plan can help increase the odds of success, but just because unmitigated risks may still exist, it shouldn’t mean that the plan should be scrapped – sometimes the potential risks are worth the reward.