How Switching Jobs Could Set Your Retirement Savings Back by $300,000
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Here's your money briefing for Tuesday, October 8th. I'm J.R. Whalen for The Wall Street Journal. Imagine putting money away in your 401k for decades, and when it's time to retire, your savings come up short by $300,000. That's how much money someone working a 40-year career could potentially leave on the table if they don't adjust their contribution levels each time they get a new job.
The median job switcher gets a significant raise, like a 10% raise when they move from one company to another, but their 401k savings rate goes down by almost a percentage point. There's that sort of mismatch of here you are progressing through your career, you're getting a nice big raise, but you're allowing your 401k savings rate to slip down, which isn't ideal.
Wall Street Journal retirement reporter Anne Turgason will join us after the break.
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Many Americans shortchange their 401k accounts when they switch jobs, according to a study by Vanguard Group. Wall Street Journal retirement reporter Ann Tergesen joins me. Ann, how much do financial advisors recommend workers plan to save in their 401k retirement accounts throughout their career?
Financial advisors will recommend that people save about 12% to 15% of their pay annually over a 30-year career.
How can switching jobs lead to a $300,000 shortfall in retirement savings?
That's said often because of company matching contributions. If the employee saves about 10% of pay, the match will often be enough to get them within that 12% to 15% range.
What happens to their 401k if they leave a job where they've been saving for, say, several years?
It just depends on the person. People who are very engaged in their retirement savings, if they leave a job and they're saving 10% of pay, those people often will sign up for the next 401k plan, or maybe they're automatically enrolled in the next 401k plan. And they make sure that they go in there and they adjust their savings rate to the 10% that they were saving at before. Or maybe they even raise that savings rate if they feel But there's a lot of people who are not actively engaged. And for those people, when they change a job, if the next employer, the new employer requires them to sign up for the 401k plan, considerable percentage of those people just never sign up. You know, it's like they have every intention of doing it, but they don't get around to it.
Or they just, they get used to their paycheck being higher and to not saving. And they keep thinking, well, I'll do it next month. Or they just forget. A third category of people, they move into another job that automatically enrolls them in the 401k plans. But often automatic enrollment happens at like 3% of pay, which is pretty low. And a lot of people who aren't super on top of their retirement savings will just leave their savings rate at 3%. It's safe to say that a significant portion of people see their savings rate decline because they're just not that engaged.
What other missteps do people make?
So when people change jobs, a lot of people actually will just go into their 401k savings at their prior job and they might withdraw some of that money or maybe even all of it.
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