A loss of income along with these other costs should alter your attitude to risk. One of the principles of investing is that the longer-term your outlook is, the more appropriate it is to invest in riskier assets, such as the stock market, that over time usually result in significantly higher returns. But without a job, you’re much more vulnerable to even short-term market shocks. So it’s wise to keep more of your wealth in safer, lower-yielding assets. This adds an opportunity cost to the compounding impact of missed contributions.
Of course, you may still decide taking time off work is worth it. Burnout is real. And there are ways to make up for some of the financial losses. In the U.K., for instance, even if you’re ineligible for Universal Credit, you might still be able to claim National Insurance credits if you apply. If you own a house, you can switch to an offset mortgage, where overpayments build up in a linked savings account and can be withdrawn if necessary.
Yet it’s worth bearing in mind that the job market might look different when you decide to dive back in. The experience of women re-entering the workforce after a child-rearing break is telling: According to a 2019 report commissioned by the U.K. government, mothers who left employment completely were three times more likely to return to a lower-paid or lower-responsibility role than those who did not take a break.
Even if you’re planning just a short leave, you have a lot to think about. The true cost of an interruption could be higher than you imagine. Make sure it’s something you can afford.
Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.