It shouldn’t come as a shock when I say it is very common for people to job-hop during their 20s and into their 30s before they settle into a long-term position. Typically, people change jobs to gain new experiences, obtain a better title, or for more pay. While these are all very good reasons that, in the long run, should be positives in our financial lives, changing jobs too often can come with a cost.
Most of the time when I have families come in for pre-retirement planning, I see that their 401(k) is their largest retirement asset, which makes sense. This is this typically their oldest account, meaning time has been on their side in terms compounding returns. They’ve consistently put money in paycheck after paycheck, and they’ve put in enough to get the full company match. This becomes the meat and potatoes of their retirement savings.
However, when I see families or individuals who’ve changed jobs every year or two, things usually look less robust. Let’s go over some of the problems that can arise from job-hopping.
It’s common for companies to require a waiting period before you are eligible to open your 401(k), typically one year. It’s also common for companies to put you on a vesting schedule on the portion they match, meaning they take their match back (or a portion of it) if you don’t stay with the company long enough. Hopping from job to job can create a sort of limbo, where either you don’t have a 401(k) available, or don’t contribute because you’re already planning your next move, or you get frustrated by having to give some of those gains back and your account in effect stalls. All of these factors can be detrimental to what is typically your largest asset.
Now, I am not saying to stay in your first job until the day you retire just so you can contribute to a 401(k). Like I mentioned in the beginning, job hopping can have great benefits, such as an increase in pay and better advancement opportunities. But, if you are still moving around and find yourself in that limbo where your account isn’t growing (or worse, doesn’t even exist), remember that there are other options when it comes to saving for retirement. Consider opening an IRA or Roth IRA. You can fund these during the periods when you don’t have a 401(k) available so there are no breaks or delays in your savings. You’ll also be able to take advantage of compounding interest with this approach.
Don’t wait until you settle into your long-term job before you think about saving – start from day one. Your future self will thank you.
Article by Kyrk Davis, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.
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