Watch Out for This When Starting a New Job

I bet if you work in the private sector you’ve likely changed jobs from time to time, right?

A fact of our modern day economy is that most workers don’t work for one employer their entire life. It’s common to switch jobs about every five years

The good news is that when we switch jobs we typically land a higher salary. But there’s also a big potential hit to our retirement security.

Vanguard recently analyzed what happens to the retirement savings contributions of job switchers. And because of how employers tend to set things up, they are causing many job switchers to save less when they change jobs.

There’s nothing nefarious going on. Just unintended consequences of well-intentioned 401(k) plan features that can backfire a bit.

As you may have experienced, many employers now automatically enroll new workers in their retirement plan when they are hired. That’s great! But the issue is when they automatically enroll someone it can typically be at a low contribution rate. For example, it’s common for many plans to start new workers at a contribution rate of 3% of salary, and some then increase that rate annually.

And when you’re job switching, you’ve got so much going on that you are grateful for the auto-enrollment.

But can you see the potential problem here? If you’ve been following my advice, you surely were contributing more than 3% of salary at your old job. My advice is to get to 10% as fast as possible, and if you didn’t save in your 20s and 30s, a 15% annual contribution rate is needed to build retirement security.

So if you’ve been saving 10% or more for years, and now switch jobs and they automatically enroll you and set a 3% contribution rate, you’re now saving a lot less for retirement! Vanguard’s study found that less than half of job switchers maintained or increased their savings rate from their prior job.

And the potential loss is a $300,000 reduction in what you might have saved up for retirement. That’s Vanguard’s estimate when it compared a 25 year old with an initial salary of $60,000 who never changes jobs (and thus gets to and stays at a 10% contribution rate for the majority of her career), to someone who has eight different job switches in a 40-year work span and each time is auto-enrolled at 3%.  Vanguard points out that because of employer’s defaulting workers at too low a rate, the impact in this example would be having six fewer years of income to live on in retirement.

Now that you understand this problem, it’s easy to fix. Whenever you job switch, do not simply rely on the auto-enrollment into your new employer plan.

On Day 1 of your new job you are to contact HR to find out the steps for increasing your contribution rate to at least what you were contributing at your old job.

And no playing around and thinking that you can contribute a lower percentage because your new job comes with a higher salary. Absolutely not approved, my friend. Your spending hasn’t yet adjusted to the new higher salary, so this is the perfect time to boost your savings. You can now save more without reducing the amount of money that you were used to landing in your checking account each month to cover your living expenses.