The world we live in has evolved rapidly over the last 50 years. As the workplace has changed, how we work, where we work, and even how we retire has taken on a whole new look.
A few generations back it was common to work for an employer for one’s entire career of 30 some years. Often those employers offered pension plans that would pay someone 50-70% of an employee’s salary for the rest of their lives with minimal employee investment. When folks were working until 65 and dying by 75, the mathematics of those pension plans worked, and it encouraged employees to stay in one place.
Today, with 10-year retirements becoming 30+ year retirements, those pension plans do not work anymore, and today’s employees most often must do the retirement savings on their own, with some companies providing a savings match. This has made employee savings more important than ever but has also allowed folks to feel more comfortable changing between numerous employers over their working years.
The trap that occurs when changing employers, is knowing what to do with that old employer’s retirement plan. They often get forgotten about for years at a time with little attention paid as to how they are invested…but even worse is the all too often choice being made to cash in these plans.
“Eh, it’s a small amount, what does it matter.”
Financial consulting group, Retirement Clearinghouse, estimates that about 41 percent of people changing jobs will cash out of their 401(k). These are often smaller amounts and sometimes still early in one’s career. We know that from the power of compounding that a 35-year-old cashing out a $20,000 401(k) will have $200,000 less money for retirement. The money, which might be $15,000 after paying taxes will end up in a bank account and spent on who-knows-what or blown on something worth a great deal less than a $200,000 retirement account!
Cashing out your retirement account when changing jobs costs tons of dollars in taxes and constantly restarts your retirement savings with less years to save and less years to compound. If one began saving $500 a month in their company plan at age 25 for the next 40 years, they would have about $1,620,000 to retire on assuming average returns. If they cashed out that 401(k) during a job transition 10 years later and restarted their savings plan, they would only have $710,000 to retire on, unless they wanted to more than double their monthly savings rate to about $1,145. Now imagine doing that multiple times over your working years.
The moral of this story is to take your retirement savings with you as your career evolves. Many 401(k) plans allow for you to “rollover” your old employer’s plan into your new ones’. If they do not, Individual Retirement Accounts (IRAs) are also available for you to independently keep those monies invested and working for you until your retirement days.
We work with folks all the time going through career transitions and its our passion to help make those transitions a positive financial event that ensure a more secure financial future, not less so. We are always happy to help.