July 27, 2017
When you land a new job you are going to be totally focused on making a great first impression. But I also want you to make sure you take care of your financial future by steering clear of two all-too-common retirement mistakes.
Don’t Fall for a Saving Hiatus. Many workplace retirement plans have a waiting period for new employees before they are allowed to contribute to the plan. That waiting period can be up to one year! If you are temporarily shut out of the retirement plan at your new job, you must make it your personal job to save in an IRA. The cost of losing out on one year—or even a few months—of savings is too steep.
For example, anyone under the age of 50 can save $5,500 this year in an IRA. If you did that just this year and then left the money to grow for another 30 years earning a 7 percent annualized return, you will have more than $38,000. If you job hop multiple times —and are frozen out of your plan each time—your forgone savings could easily be worth six figures.
For those of you who are married, another option is for the other spouse to increase his or her contributions to her plan. So for example, let’s say your spouse currently contributes $10,000 a year into his 401(k). The maximum this year is $18,000 for someone 50 or younger (or $24,000 for anyone at least 50 years old.) So your spouse could increase his contributions up to those maximums, and help your household stay on track with retirement saving.
Keep What You’ve Already Saved Working for Retirement. When you leave a job you are allowed to take your retirement savings with you. That includes “cashing out” your savings. Do.Not.Do.This! Do you hear me? I get how tempting it can be. But it is such a huge mistake.
For starters, you will owe income tax on 100 percent of the withdrawal, and if you are younger than 55 you will also be hit with a 10 percent early withdrawal penalty. The bigger issue is that you’ve just used money today that you will need to support you in retirement.
Let’s run through an example: You have $25,000 in a 401(k). You get a new job and decide to cash out the $25,000. After tax and the 10 percent early withdrawal penalty you likely will end up with just $18,000 or so in your pocket.
If you left the $25,000 growing for retirement, and it earned an annualized 7 percent for another 30 years, it could be worth around $190,000. I don’t think you need me to explain the tradeoff between $18,000 today and nearly $200,000 in retirement security!
We’re all in agreement that you want your retirement savings to stay invested for retirement. That said, you have a few choices to make. If you have at least $5,000 in your ex-employer’s plan, you can just keep it there. Or you may be able to move the money to your new employer’s retirement plan.
The third option is my favorite: do a direct IRA Rollover to a low-cost brokerage such as Vanguard, Fidelity, Schwab or T.D. Ameritrade. All those companies offer mutual funds and exchange traded funds with very low annual expense ratios. (The fee all investors in funds and ETFs pay.) The less you pay in fees, the fatter your retirement pot will grow.