10/19/2012 2:45 PM ET|
How job-hopping can hurt retirement
With people now routinely changing employers throughout their work lives, it's critical that they take charge of nurturing their nest eggs.
Baby boomers born between 1957 and 1964 held an average of 11 jobs between ages 18 and 46, according to a recent Bureau of Labor Statistics analysis. Job duration increased as these workers aged, but they generally continued to have large numbers of short-term jobs even in middle age. Among jobs started by 40- to 46-year-olds, 33% ended in less than a year, and 69% ended in less than five years.
If you don't consistently save on your own, job-hopping can hinder your ability to retire comfortably. Many 401k plans have vesting schedules and other rules meant to reward long-term employees; those rules often give workers with short tenure little or no benefit. Here are five ways job-hopping can harm your retirement savings:
Leaving before you're vested
Many employers contribute matching funds to employee 401k plans, but workers often don't get to keep that money until they are vested in the plan. Some companies don't fully vest workers in the 401k plan until they have been with the company for as long as five (18%) or six (14%) years, according to a recent analysis of more than 1,700 401k plans administered by Vanguard. Some companies allow workers to keep a gradually increasing percentage of the 401k match based on years of service, while others don't allow workers to keep any of their 401k match until they hit a certain number of years on the job.
"Obviously, if you have an unvested match of any significance, it should be part of the decision-making process," says Jamie Milne, a certified financial planner for Milne Financial Planning in West Danville, Vt. "If you are three days away from it, hang in there for three days. If you are three years away from it, life needs to move on if you don't want to be there."
Surrendering to the urge to cash out
Almost half (45%) of workers who withdrew money from a 401k plan in 2010 failed to roll it over to another retirement account, up from 40% in 2007, according to a Center for Retirement Research at Boston College analysis of the Federal Reserve Board's Survey of Consumer Finances data.
Cashing out a 401k before age 59½. will cause you to incur significant taxes and fees. For example, a person in the 25% tax bracket who withdraws $5,000 from a 401k will get to keep just $3,250 after paying income tax and a 10% early withdrawal penalty. People who take early withdrawals also miss out on the compound interest they could have accumulated in the time before retirement.
"I know it's tempting, but the most important thing is do not ever withdraw your retirement savings from the account," says Carol Ringrose Alexander, a certified financial planner and the executive vice president of Retirement Investment Advisors in Oklahoma City. "Consolidate your account and move it to an IRA or your new employer if that plan will allow it."
Once you decide to move your money, it's important to avoid taxes and penalties while rolling over your money to a new retirement account. It's generally best to have the money transferred directly to the new financial institution. If a check is made out to you, 20% of your account balance will be withheld for income tax. If you don't deposit the full amount, including the withheld 20%, in a new retirement account within 60 days, additional taxes and the early withdrawal penalty may be applied.
"I always recommend that people directly transfer it to an IRA with some very cost-efficient and well-diversified index funds or exchange-traded funds," says Abigail Pons, a certified financial planner for Capella Financial Services in Bangor, Maine. "For people who have several job changes over a career lifetime, it can be very effective to start an IRA and then consolidate every time they leave an employer behind."
If your new employer allows it, you may also be able to transfer the balance to your new 401k plan.
Not saving during enrollment waiting periods
Just over half (59%) of workers are allowed to begin contributing to a 401k plan with their first paycheck. Other workers face waiting periods ranging from three months (17%) to a year (12%) before they become eligible to contribute to a 401k plan, according to a Plan Sponsor Council of America survey.
Most companies also have service requirements before new employees become eligible for a 401k match, often requiring one year (29%) of job tenure before any employer contributions are offered. It's important to find out when you are eligible for both the 401k plan and employer contributions to your retirement account. If there's a long waiting period, it's prudent to do some saving on your own outside the retirement plan.
"I would definitely start an IRA independently, and then there are always taxable options," says Pons. "Max out an IRA first up to the $5,000 limit, and then save into a taxable account."
Not doing the homework on your plan
Once you become eligible for the plan, you need to choose an appropriate savings rate and study your investment options. Many new employees are automatically enrolled in 401k plans, most commonly with the company investing 3% of an employee's paycheck in a target-date fund. However, you should review whether the default savings rate and investment option will meet your retirement income needs. If you aren't automatically enrolled, you'll need take the initiative to sign up.
"People are really busy when they change jobs," says Alexander. "It's hectic, and sometimes you just don't get around to it."
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Leaving before I'm vested? Unwillingly. I've had companies lay me off because they realized I was about to become fully vested. They also had contract clauses that allowed them to keep most of what I would have be vested into.
Cash out my 401(k)? The stock market did that for me a couple of years ago. Now I have to rebuild over twenty years of retirement savings that got wiped out overnight, with less than twenty years of working life left. You can bet I won't be in the stock market again.
Managing rollovers? I did that (it was common advice) until the stock market managed to roll it into the grave for me. No more advice from money managers for me!
Not saving enough? How about not having enough to save, after struggling to pay bills during unemployment and underemployment? I'm doing the best that I can, but I won't default on my debts in order to save.
Not doing homework on my 401(k) plan? What 401(k) plan? I cannot find a job that offers benefits anymore, including a 401(k).
How about an article about revamping our retirement strategies? Something that the average Joe who has been downsized can use?
as a boomer, 6 out of 10 companies that i have worked for are gone. so i "job hop".
gone thru goining of of business, being sold and moving out of state, or sending their work to china.
you think i wanted a job history like this?
i have fingured however that the 401K is not the ONLY way to save.
having had several companies impose job wage freezes, vacation freezes, salary cuts i have insured that i keep enough cash on hand for the likely next job change. i have accelerated home payments for years and should be free and clear in about a year.
i note that the 401K-IRA plans will force me to take only specific amounts of MY CASH thru the retirement years. so i am insuring i have 401K money and personal available savings investment cash.
these articles like to imply the ONLY way to retire is with a 401K-IRA account. it's not
Of course, the number one issue that is overlooked when job hopping is what are the benefits including retirement whwn job hopping. The total package not just current pay.
Also, most companies do not like to dump you right before you vest because lawsuits can abound. Contact a lawyer to talk to your company shortly after a layoff (even the small stuff) and suddenly miraculous things happen.
401k..what a joke..
lost all of it after 6 years on the job..
who wrote this article?..pleeeease....
it seems like some of these people (julio and emily) are out of touch with reaityI worked for 8 years with one employer and when my employer squandered the profits and had to lay 25% of the professional workforce off to cover his screw ups I had no choice but to use my savings and 401 (k) to get me through to the next position which did not happen for 6 months, even worked at Target stocking shelves during that time.
In 22 years of being out of school I have had two jobs that lasted 8 years and couple months each and in between that time had four contract positions lasting a year or so....do you consider that job hopping. I consider it survival.
Now the employer I am with (8 years mind you ) just announce layoffs but has no with the fact that he has invested in various opportunities that have not panned out. Mean while our bread and butter clients have gone elsewhere due to his lack of attention to them....
---And to whom are you talking here? Except for government workers, like all of them including teachers/police, and tax collectors--only 34 % of the rest actually have a company that provides for a company 401 K partially paid also by the company, and then the regular food service part time and regular workers, that is 41 % who gets no 401 K or retirement--and they must then pay their own retirement fund at/from 8 Dollars an hour pay scales, after they first have paid SS on those 8 Dollars--did I mention medical ins payment at average 4 Dollars an hour?(8-10 K a year) for those too? --(those types you usually sit here and dish on about welfare)
It would be nice if you could actually stop pretending the entire USA is so organized---
PS: and for all those government workers, we the rest pay for them to laugh at us when they retire, some government jobs only have to work 20-25 years, like the military--police etc.
Yes, the rest of us as indirectly suggested here are apparently just a bunch of idiots.
I was licking my chops in 2008 when the market fell. I upped mine and my wife's 401k contributions right then. Our 401k went down to 98K from 200k. But then when the market roared back, our 98K is now 425K. Don't be scared of the market and invest for the long term.
I worked for a city as a Police Officer, they had one of those plans, that if you left or quit the job
you would lose all of your retirement savings, I was vested with 8 years of Service, but I couldn't make a living and provide for my family so I had to leave.
with the job market for the last three years , whats a 401k ? don't forget the people with hard times falling upon them the cash reserve is very a atractive thing to consider for the short term for bills due.
thats a consideration to do but with doing so comes with a cost !
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