Millennials have been dubbed the “job hopping generation,” and I’ve contributed to that cliché. I started my career when I was 22 and have been jumping from job to job almost every year since. For many of those years I was young and restless, and another part of me was looking for a more fulfilling job and pay that reflected what I was worth.
In a way, changing jobs has set back my retirement savings. There are things I wish I’d learned sooner, like how to start planning for retirement, the importance of developing challenging skills, and how to negotiate benefits. But it also helped me improve my income. When the “lifestyle creep”—when your income and spending habits increase as well—stopped getting the best out of me, earning more meant I could save more for retirement.
Here are some scenarios where job hopping can help your retirement savings and where it can hurt.
YES — IF YOU IMPROVE YOUR EARNING POTENTIAL
In one of my earliest writing jobs, I made about $25,000 a year. As much as I enjoyed writing, I knew I was underpaid and overworked. My next step was to look for ways to make more money as a writer, and that’s when I realized I needed to develop new skills, such as writing. B. Optimizing my writing so it would be visible on search engines like Google. Within a year, I started a new job that was making me $45,000 and offering more benefits. Since I was no longer living paycheck to paycheck and finally had a 401(k) plan, I was able to start saving for retirement.
Changing jobs for a significant increase in income could potentially support your retirement savings, but it requires that you actually invest some of that increased income into your retirement savings.
What is the measure of a “significant” increase in income? Aim for a 10% increase, says Mary Beth Storjohann, board-certified financial planner and co-CEO of Abacus Wealth Partners in Santa Monica, California. If a new job offer comes in underneath, Storjohann recommends checking the numbers to see how much your net salary actually improves when you include taxes and other living expenses.
NO – IF CORPORATE MATCHES AND EQUITY ARE NOT FULLY ALLOWED
When you’re job-hopping, don’t leave free money on the table because it could hurt your retirement savings, says Jerel Butler, a CFP and CEO of New Orleans-based Millennial Financial Solutions. Before you throw up the Deuces sign, consider getting your full retirement plan, restricted stock units, or other company stock if your employer offers it.
“Typically, companies have a special vesting schedule for employees to incentivize them to continue working at that particular company,” says Butler. “Sometimes companies that match contributions for 401(k) plans may ask you to contribute up to two, three, or even four years before the company contribution fully vests.”
Butler also suggests hanging around long enough to claim potential bonuses, which are often paid out in the first quarter of the year.
NO – IF BENEFITS DO NOT IMPROVE PENSION SAVINGS
The right benefits package could improve long-term retirement savings, so it’s something to consider when changing jobs. When I accepted the aforementioned job, I didn’t think about it. It turned out that health insurance premiums cost me about $500 a month, there were no flexible work arrangements, and the company didn’t offer any educational grants. These things indirectly impacted my retirement savings because I had less money to save and little potential for growth.
Storjohann says benefits to consider that could improve your retirement savings include where you work, access to retirement accounts, employer-match amounts, health insurance, educational grants, stock options, and annual raises.
YES – IF YOU DO A 401(K) ROLLOVER
A few months after I left my first job that offered a 401(k) plan, I got a check in the mail for about $300. I remember thinking, “Wow! Free money just in time for the weekend.” Shortly after I spent the “free money,” I realized it was the balance in my 401(k) account. I was supposed to transfer it to another retirement account within 60 days, but instead I squandered it on weekend celebrations.
Cashing out 401(k) accounts or forgetting they even exist is a common mistake people make when changing jobs, and it can hurt your retirement fund, says Storjohann. A withdrawal or an unqualified early withdrawal may subject you to a 10% penalty and income taxes on the withdrawn amount.
“You’re like, ‘Oh, the bankroll isn’t that big, I’ll just pay it off.’ So instead of earmarking the money for retirement, it’s usually spent, and then you still pay a penalty,” says Storjohann.
This was certainly the case for me and it may have set my retirement savings back a few thousand dollars. Let’s say I invested that $300 in an IRA and got a 7% annual return — after 30 years, I’d have over $2,200.
If I had a time machine, I would still have changed jobs, but I would definitely have done a 401(k) rollover to maximize my existing retirement savings.
This column was provided to The Associated Press by personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice.
Elizabeth Ayoola is a writer at NerdWallet. firstname.lastname@example.org.