Job hopping can hurt your ability to retire on time, says a recent article in U.S. News & World Report.
Baby boomers and younger workers are job-hopping at record rates. Younger baby boomers (born between 1957 and 1964) have held an average of 11 jobs by age 46, says the Bureau of Labor Statistics.
While about half those jobs were held by boomers when in their young 20s, they continue to switch jobs frequently at older ages. One-third of all jobs started by boomers in their 40s lasted less than one year.
That can hurt you financially unless you make a diligent effort to save on your own. Here’s why:
You may miss out on benefits
At some businesses, you may lose all or part of the “employer match” portion of your 401(k) if you leave too early. So make sure you check the vesting schedule before you hand in your resignation.
If your job is one of the few left offering a pension, you may not stay long enough to become vested. Generally, you need a certain number of years of service to qualify for the pension. Plus, the greatest pension benefits tend to accrue at the end of career when your years of service and salary are high.
When you leave a job, don’t cash out
According to U.S. News and World Report, almost half of all workers cash out their 401(k)s when they leave a job, losing thousands of dollars to taxes, early withdrawal penalties, and lost savings opportunities.
Cashing out your 401(k) should be your last resort. In a study conducted a few years ago, Hewitt Associates found that nearly half of all workers who left their jobs cashed out their 401(k) accounts instead of rolling their money to a qualified IRA or leaving the money in their former employer’s 401(k) plan.
That’s an extremely costly decision. Cashing out a 401(k) too early can trigger a 10 percent early-withdrawal penalty on top of federal and state income taxes. In some situations, that could leave you with less than 50¢ on the dollar.
In fact, “cashing out is like shooting yourself in the foot financially,” cautions Money Magazine in its 401(k) guide.
Roll your 401(k) funds to stay tax-deferred
For most people, rolling the balance from your old 401(k) to an IRA is the best plan. When the rollover is done correctly, there will be no taxes due and your funds will continue to grow inside the IRA on tax-deferred basis for many more years. The key is to execute a “trustee-to-trustee” rollover. A qualified professional should be able to help with this. Leaving your funds behind at the old job is usually not a good idea. It simplifies your asset allocation and account management to consolidate these plans in one IRA under your control, instead of your former employer’s.
Sign up for the savings plan at your new job as soon as possible
To keep your savings on track, sign up for your 401(k) or savings plan at your new job as soon as possible. Your employer may enroll you automatically, but the default 3% contribution isn’t enough to cut it. For most people, you need to save 10% to 15% of salary each year.
If you are not allowed to participate in the new plan for a long time, like 6 months or a year, explore other options like a Traditional or Roth IRA, or save in a non-retirement brokerage account. Otherwise, you risk falling behind on your savings goals.
Financial Tip: One of the services we offer our retainer clients at no additional charge is a periodic review of their 401(k) or workplace savings plan to check contribution levels and asset allocation choices. Just send us a recent statement and we’ll do the rest.