When you retire a character you can replace it with a new character UP TO one level lower than it. Any exp lost in this way (a minimum of one level's worth by definition) is divided in half and credited to the player, trackable on a wiki page the same as DM Credits are.
Thus if I were to retire a level 2 character that had 1250 exp on it, I would be credited with 625 exp. That exp can be applied to any character at any time (with judge approval) the same as DM Credits.
To fix the "negetive wealth" issue, simply award gold to the character as if the exp credited was time exp. So if I were to turn around and apply that 625 exp to a level 4 character I would also get 700g.
625/145 (the monthly exp for level 4) = 4.3 (round down)
4 x 175 (the monthly gold for level 4) = 700g
I think that is PERFECT! It gives a penalty for changing characters, but takes a bit of the sting away, while still keeping wealth by level in mind. Awesome!