According to research from Zippia, 91% of millennials plan on changing jobs every three years, while those aged 25 to 34 stay, on average, no longer than 2.8 years with any employer.
While job-hopping may help you gain new skills and increase your salary, this strategy may end up short-changing your long-term financial security during retirement.
Unvested employer retirement plan contributions
A huge benefit of participating in a 401(k) plan are the contributions your employer makes to your account.
While a growing number of companies offer immediate vesting of matching contributions, other companies may use:
- A graded schedule that gradually vests matching contributions over a period of up to six full years of service; or
- A 3-year “cliff” schedule, where 100% of matching contributions are vested after three full years of service.
Some companies use a mix of immediate and scheduled vesting. For example, matching contributions may be vested right away, but annual profit-sharing contributions are vested over several years.
If you leave your company before any of these contributions are fully vested, you could be leaving a lot of money destined for your retirement on the table.
That’s why it’s important to fully understand your plan’s vesting schedule and calculate whether the financial benefits of switching employers before you’re fully or partially vested outweigh the incentive of staying put until you can take a greater share of your company’s contributions with you.
Unvested stock options
One reason you joined an exciting startup company was because you were hoping that the thousands of stock options they promised during your interview would let you retire at age 60 when the company went public.
But perhaps in all the excitement you didn’t realize that just because a company grants you stock options doesn’t mean you can do anything with them right away.
In nearly all cases, stock options are subject to vesting schedules as well. You might have to wait up to four years or more between the time they’re granted until the day they're fully vested.
You can usually exercise stock options that have vested and take the private stock shares with you if you leave the company. But you’ll leave unvested options behind. Also, vested options generally have an expiration date (often ten years from the vesting date), so if you forget to exercise them by the deadline they’ll be worthless.
Even if you’ve decided your company will never go public, you shouldn’t forget about your vested options. Many companies now buy exercised or unexercised stock options from former employees at startups.
If you sell your options or exercised shares to these firms you probably won’t make a fortune, but if you take the proceeds and contribute them to an IRA, you’ll be doing that much more to build your retirement nest egg.
Inactive retirement accounts
Many frequent job-switchers forget about the retirement accounts they’ve left behind at former employers. According to research from Capitalize, there are nearly 30 million left-behind or forgotten 401(k) accounts worth more than $1.6 trillion in assets.
Most employers don’t want to pay their recordkeepers to maintain these inactive accounts indefinitely.
If the value of any of your accounts is between $1,000 to $7,000, ex-employers can roll over the assets into an IRA with a custodian of their choice without your permission.
Legally, they’re required to let you know what they’ve done, but if you’ve moved and they don’t have your current contact information, you might not know that they’ve moved your money somewhere else.
Even worse, if your 401(k) account is worth less than $1,000, employers can cash out your account and mail you a check for the balance. Since this is treated as a retirement plan distribution, you may have to pay taxes and, if you’re under age 59½, an early withdrawal penalty. You may be to able avoid paying these taxes if you deposit the proceeds into a Rollover IRA within 60 days of receiving the check.
But rather than let former employers decide what to do with your retirement savings, you can save yourself a lot of hassles by completing direct rollovers of money from these inactive accounts into your new employer’s 401(k) plan or into an IRA, where at least all of your retirement money will be in one place.
This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. David can be reached at 508.598.1082 or djaeger@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
©2024 Canby Financial Advisors.