Don’t Let Changing Jobs Derail Your Retirement Savings
Today’s workers are hopping jobs more frequently throughout their careers than those of past generations. According to the U.S. Bureau of Labor Statistics, baby boomers held an average of 12.7 jobs between the ages of 18 to 56, while millennials have held an average of nine jobs between the ages of 18 and 36.1
While job hopping can lead to a higher salary, research shows it can also harm your long-term retirement savings. In fact, Vanguard recently reported that a worker who earns $60,000 at the beginning of his/her career and works for nine different employers could lose up to $300,000 in retirement savings potential.2 That’s due to the retirement savings volatility that results from going in and out of multiple employers’ retirement plans.
If you frequently switch jobs, it’s important to avoid the following 401k mistakes.
Mistake #1 – Experiencing a pause in savings
Whenever you switch jobs, it’s important to start contributing to the new employer’s plan as soon as possible. Waiting even a few months to contribute can negatively impact your long-term savings potential.
Some employers have a waiting period between when you begin working and when you’re able to contribute. Don’t let this waiting period be an excuse not to save. Instead, continue contributing to a traditional or Roth IRA while you wait for your 401k eligibility period. Doing so will help you stay on track with your retirement savings goals.
Mistake #2 – Leaving a company before you’re fully vested in its 401k
Many employer-sponsored retirement plans have a vesting schedule that applies to employer matching and profit-sharing contributions. If you quit the company before you complete the stated vesting period, you’ll likely forfeit any non-vested account balance. If you do this several times throughout your career, it could potentially impact your financial situation. Before you make the decision to leave a company, make sure you understand its retirement plan vesting schedule. If you’re close to being fully vested, it may make sense to continue working there a while longer to avoid leaving money behind.
Mistake #3 – Withdrawing assets from a previous plan
If you cash out a 401k and take possession of the assets, you’ll need to pay ordinary income taxes on any pre-tax money. And, if you haven’t yet reached age 59 ½ when you take the withdrawal, you’ll likely need to pay an additional 10% early withdrawal penalty.
While this decision can be challenging, it’s important to consider the potential growth you may miss out on if you withdraw your money from the market. Even a small account balance has the potential to grow exponentially over time, thanks to the power of compounding interest. Withdrawing your assets completely means you no longer have access to that growth potential.
Mistake #4 – Making mistakes with a rollover
A mistake with a rollover can expose you to significant taxes and penalties. If you plan to complete a rollover to an IRA or a new employer’s plan, it’s important to ensure the balance is transferred directly to your new financial institution. This way, no income tax will be withheld.
Mistake #5 – Withdrawing or rolling over company stock
If you have employer stock in an older 401k, it may make sense to leave it behind. Some employer stock is eligible for special tax treatment as long as it remains in the employer’s retirement plan. Your wealth manager can advise you on the best course of action.