5 Ways Switching Jobs Could Affect Your Retirement Savings
Written by
Kerra Bolton
Edited by
Daria Uhlig
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More than two-thirds of Americans (67%) plan to change jobs in the next six months to improve their work/life balance, according to the 2024 State of the Workforce Report by Flexjobs, a remote job site.
Switching jobs can feel exhilarating and risky, especially during your critical retirement savings years. But with proper planning, it can work to your advantage.
Here are five ways switching jobs could affect your retirement savings.
Losing or Disrupting Your Employer Contributions
You risk losing or disrupting your current employer’s contribution to your retirement savings when switching jobs.
The risk is especially higher for those who leave before they are fully vested in their company’s 401(k) plan. Leaving early could mean keeping only a portion or even none of your employer’s contribution when you switch jobs.
Erika Kullberg, an attorney and personal finance expert, offered tips for keeping tabs on your retirement accounts, including former employer plans, if you change jobs often.
“Keep track of all retirement accounts, including former employer plans, in one master list, and use online account aggregators or other financial planning apps to track retirement savings,” Kullberg said. “Talk with former employers about account options for those retirement plans so that you don’t forget about those accounts and neglect important retirement savings.”
Resetting Your Social Security Earnings Limit
Switching jobs also affects how much Social Security benefits you receive once you retire.
Social Security benefits are based on your highest 35 years of earnings. If you make less, your Social Security check will be smaller, so you’ll have to save more to make up for it.
Alternatively, a higher-paying job could give your benefits a nice boost and might influence how much you save for retirement.
Your Retirement Benefits Change
Retirement benefits vary by company, and you may have considered the employer’s retirement package before changing jobs or careers.
Some employer-sponsored retirement packages include 401(k) plans with higher fees, while other employers offer stock options, pensions and other savings plans as part of their packages.
While it’s tempting to think about what you’ll gain when switching jobs, be sure to factor in what you might lose. For example, you could encounter long-term costs when leaving a company that offers a pension plan, said Paul Tyler, head of Marketing Innovation at Zinnia and host of “That Annuity Show” podcast.
“If you do switch employers frequently, consider building your own personal ‘pension’ with annuities,” Tyler said.
You’re Tempted To Cash Out
Cashing out your retirement savings when you switch jobs can be tempting but could trigger taxes and penalties.
“Though it may be tempting to use that money for an overdue vacation, it’s always a good idea to try to save that money,” said Jordan Teel, CEO of Everly, a life insurance company.
You’ll have to determine whether the immediate windfall you experience is worth the compound interest you’ll lose if you had kept the money in your retirement savings.
Instead, you could take the long view and use some of your retirement savings to fund a whole life or universal insurance policy.
“Not only does it provide death benefit coverage that you may have lost through your employer, but it can also offer the potential to build cash value within the policy,” Teel said.
You Have More Options
Another alternative to cashing out your retirement savings is to roll it into your new employer’s plan or into an individual retirement account.
The advantages of rolling over your retirement savings to an IRA account include consolidating accounts, reducing fees and getting better investment options. However, if the rollover process isn’t handled properly, you could get hit with taxes and penalties.
“Evaluate the new retirement plan against the costs and products available in an IRA rollover account,” Tyler said. While some employers have great plans, most limit investment options.
Tyler explained, “It may simplify tracking retirement savings but may constrain your choices. Depending on your age, consider the benefits of moving some or all (of your savings) into an annuity.”
Investigate the pros and cons of an IRA vs. an annuity and determine which one is right for you.
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