Job hopping remains one of the best ways for workers to increase their pay. The current strong job market provides ample opportunities for career changes. However, switching jobs requires careful attention to retirement savings, specifically your 401(k).
When transitioning to a new job, it’s crucial to actively sign up for your new employer’s 401(k) plan. You must decide how much of your paycheck you want to contribute. Neglecting this step could result in automatic enrollment at a default percentage, usually around 3% or 4%.
This is lower than the commonly advised 10% to 15% of your pay. Many 401(k) plans also automatically increase the savings percentage by 1 percentage point per year. For seasoned workers, failing to adjust contributions when starting a new job could mean contributing significantly less than intended.
In some cases, non-enrollment could lead to no contributions at all.
Prioritizing 401(k) amid job shifts
This could potentially result in a $300,000 shortfall in retirement savings.
This figure comes from a recent Vanguard study. It projected the impact of inconsistent retirement contributions for a worker earning $60,000 at the start of their career, switching jobs eight times. The study also highlighted that the average U.S. worker can expect to switch employers nine times throughout their career.
Each job change typically results in a 10% increase in pay but a 0.7 percentage point drop in retirement saving rates. To illustrate the scale of job changes in the U.S., more than 3 million workers quit their jobs in August, based on the most recent government data. While this is a decrease from the peak of over 4.5 million two years ago, it remains significantly higher than the 2 million low during the pandemic.
Ensuring that your 401(k) contributions remain consistent and adequate is essential. It is important for maintaining financial wellness and securing a comfortable retirement. As of 2022, a little more than half of all U.S. households have a 401(k) or similar plan or an individual retirement account, according to the Congressional Research Service.
