WSJ Your Money Briefing - How Switching Jobs Could Set Your Retirement Savings Back by $300,000

Episode Date: October 8, 2024

While the median job switcher gets a 10% raise each time they move to a new company, their potential retirement savings can fall short because they forget to re-adjust contribution levels. Wall Street Journal reporter Anne Tergesen joins host J.R. Whalen to discuss how much financial advisers recommend workers should plan to save in their retirement accounts over their career. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Markets always present challenges. Good advice and active management turn challenges into opportunities, because passive investing simply isn't an option. Dynamic funds, invest with advice. Visit dynamic.ca slash advice to learn more. Here's your money briefing for Tuesday, October 8th. I'm JR Whalen for The Wall Street Journal. Imagine putting money away in your 401k for decades and when it's time to retire, your

savings come up short by $300,000. That's how much money someone working a 40-year career could potentially leave on the table if they don't adjust their contribution levels each time they get a new job. The median job switcher gets a significant raise, like a 10% raise, when they move from one company to another, but their 401k savings rate goes down by almost a percentage point. There's that sort of mismatch of here you are progressing through your career, you're getting a nice big raise, but you're allowing your 401k savings rate to slip down, which isn't ideal. Wall Street Journal retirement reporter Ann Turgeson will join us after the break.

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career? Financial advisors will recommend that people save about 12 to 15 percent of their pay annually over a 30-year career. That's said often because of company matching contributions. If the employee saves about 10% of pay, the match will often be enough to get them within that 12 to 15% range. What happens to their 401k if they leave a job where they've been saving for, say, several years? It just depends on the person. People who are very engaged in their retirement savings,

if they leave a job and they're saving 10% of pay, those people often will sign up for the next 401k plan, or maybe they're automatically enrolled in the next 401k plan, and they make sure that they go in there and they adjust their savings rate to the 10% that they were saving at before, or maybe they even raise that savings rate if they feel that they need to.

But there's a lot of people who are not actively engaged. And for those people, when they change a job, if the next employer, the new employer requires them to sign up for the 401k plan, considerable percentage of those people just never sign up. You know, it's like they have every intention of doing it, but they don't get around to it or they just they get used to their paycheck being higher and to not saving and they keep thinking well I'll do it next month or they just forget. A third category of people, they move into another job that automatically enrolls them

in the 401k plans, but often automatic enrollment happens at like three percent of pay which is pretty low and a lot of people who aren't super on top of their retirement savings will just leave their savings rate at three percent. It's safe to say that a significant portion of people see their savings rate decline because they're just not that engaged. What other missteps do people make? So when people change jobs, a lot of people actually will just go into their 401k savings at their prior job and they might withdraw some of that money or maybe even all of it. You have to pay taxes and often you have to pay a 10% penalty if you cash out or withdraw

your savings early. Another mistake that people make is they roll over their old savings into an IRA, but they don't realize that when they roll it over, the money is sitting in cash. A lot of people think that when they roll it over, the money is automatically invested in the markets, and it's not. And so people who do that rollover, sometimes years later they find the money still sitting in cash and they could have earned a higher return in the stock market.

You went through the numbers in a study by Vanguard on this topic, what did you find? They looked at like over 50,000 people in their own universe of 401k plans that they administer. They looked at people who switched jobs and moved from one Vanguard administered 401k plans that they administer, they looked at people who switched jobs and moved from one Vanguard administered 401k plan to another. They were able to look at the behavior of people before and after they switched jobs. And what they found is that the median job switcher gets a significant raise, like a

10% raise, when they move from one company to another, but their 401k savings rate goes down by almost a percentage point. In general, there's that sort of mismatch of here you are progressing through your career, you're getting a nice big raise, but you're allowing your 401k savings rate to slip down, which isn't ideal. What are the long-term effects

if someone doesn't boost how much they contribute when they start a new job? If contribute when they start a new job. If every time you start a new job, you're thrown back to that 3% savings rate under automatic enrollment, often employers will automatically increase people's savings rate by one percentage point a year, but it's just going to take you a long time to get to that ideal 12 to 15% if every time you leave one employer to go to another, your savings rate declines. Vanguard did an estimate of what would happen to somebody who switched jobs eight times and each time they switched, their savings rate went back to 3 percent,

which is the most common savings rate under automatic enrollment. And they found that for somebody earning like about an average salary of $60,000 at age 25, they found that over a 40-year career, this can mean that they save about $300,000 less than they would have had they gone in at 3%, increased by 1% a year until reaching that ideal level. Did the benefits departments at companies have any programs in place to remind new hires to track how much they're putting into their 401ks? Either the employer or the 401k record keeper will send emails sort of nudging people, hey, you might want to take a look at your savings rate. It doesn't mean that all employers do that, but these days probably quite a few do. That's WSJ reporter Ann Turgeson and that's it for

your money briefing. This episode was produced by Zoe Culkin with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal. Thanks for listening. you