Employer-sponsored retirement plans like 401(k)s are the primary tools working people use to save for their golden years. People used to say he spent all or most of his tenure at one company, but now he is much more likely to change jobs.
Unfortunately, about 40% of people make costly mistakes when changing jobs, which can cost them thousands of dollars in the long run. So if you’re thinking about getting a new job one day, read this so you don’t unintentionally hurt your financial future.
4 out of 10 people make this mistake when changing jobs
Too many people cash in their old retirement plans when they retire to get a new job. According to a study by harvard business review, Just over 40% of workers cash in at least a portion of their 401(k) plans when they retire or change jobs. Most of those people, about 85%, withdraw their funds in full.
why? The reasons are individual, but the study found a correlation with employer contributions. Basically, the more the employer contributes to her 401(k), the more likely the employee is to run out of the account. Some workers seem to think of employer contributions as: free moneyis given to you, so you want to use it more.
There are many prepayment penalties for withdrawing your severance pay early. First, he will probably be fined 10% and have to pay income tax on the funds he withdraws.
Real cost will be felt over time
But it’s a small potato compared to the formula lost. It’s not immediately felt, but it becomes poignantly apparent as the years go by. For example, let’s say you’re his 30 and quit his first job in search of a better career change. I saved $10,000 on my first attempt at building a nest egg, a 401(k).
Hypothetically, if you pay the 10% early withdrawal penalty, you’ll still have $9,000 before income tax. For the sake of illustration, let’s keep the tax as a round number, like $1,000 for him. Use the rest of her $8,000 to get a great vacation before taking her next job.
that $10,000, S&P500After 30 years, you will have over $174,000 without adding an extra dollar. That’s about as much as a typical her 45-54-year-old worker would have stocked for the entire nest egg. As you know, compound interest becomes more effective over time. Cashing out a retirement plan is like blowing up the compound interest process and starting over.
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Luckily, you have several options when it comes time to quit your job. In many cases, you can keep your existing 401(k) from your previous employer. 401(k)s can also be incorporated into new employer plans and personal accounts like traditional IRAs.
The goal is not to give up your retirement savings just because you’re changing employers. Are your balances met by employer contributions? So what? Compound interest works the same for every dollar you put in and your employer’s contributions. It will hurt your retirement savings efforts to cash in early.
Given that America doesn’t save enough for retirement (the median retirement balance at age 65 is just $87,000), this is a mistake most people can’t afford to make.