November 30, 2023
More than 80% of Gen Z workers recently surveyed said changing jobs is central to their career strategy. The big reasons stated are to acquire new skills, take on new challenges, and seek out jobs that align with their values.
I am on board for all that. But whether you’re Gen Z or a bit older, I have to tell you that job hopping can be hazardous to your retirement security, if you don’t make sure you get everything right.
Here are some tips for job hoppers:
Before you leave, check when your match vests.
If you have a 401(k) at your current job and it offers a matching contribution from the employer, chances are that match has strings attached. Each plan sets its own vesting schedule, which is the technical term for how much of the match is yours at set dates. For instance, some plans might say that 1/3 of your match is permanently yours after 12 months, another 1/3 after two years, and the final 1/3 after three years.
If you’re within a few weeks or a month before your next “vesting” happens, I think it’s worth considering how to stay put until you are entitled to take that money with you.
When you leave a job, you can typically leave the money where it is, move it to another retirement account, or take all the money as cash. That last one is a hard no.
I realize it can be tempting, especially if you are a Gen Z with a smaller balance. Resist. Please, resist. Every penny you cash out from a traditional 401(k) will be taxed as income. With a Roth IRA, your earnings (but not what you contributed) will be taxed as income.
And the bigger issue is the opportunity cost of cashing out: you no longer have that money growing tax-deferred (or tax-free if it’s in a Roth) for you. For example, let’s say you cash out a $10,000 401(k) when you leave a job. And let’s presume you spend that money. If, instead, you kept the $10,000 growing for another 30 years, it will be worth more than $57,000 assuming a 6% annualized return.
The way to frame that in your mind is not that you cashed out a $10,000 401(k), but that you denied yourself $57,000 for retirement. I hope that will help you resist cashing out.
Consider consolidating your 401(k)s.
If you are a serial job hopper, you might have two or more 401(k)s from former jobs. It can make sense to have your retirement savings under one roof. It just makes it easier to stay on top of things. (And when you retire, it makes taking your required minimum distributions much easier.) You may be able to move old 401(k)s into the plan at your current job. That only makes sense if the plan offers low-cost index mutual funds.
I suggest you consider moving all your old 401(k)s to an account at a discount brokerage. The new accounts will be called rollover IRAs. If you have a Roth 401(k) you can rollover to a Roth IRA. If you have a Traditional 401(k) you will rollover to a Traditional IRA.
Fidelity, Schwab, and Vanguard all have low-cost index mutual funds, and low-cost exchange traded funds. It’s easy to do; just follow the directions for a “direct rollover.” That’s the formal term for having the money sent directly from your old plan into your new rollover IRA. That’s smart because it ensures you will have zero tax when you make this move.