Why Job Hopping Hurts Your Retirement
Promise of a substantial salary hike by your current employer’s rival company, wooing you for some time to join its ranks, can be really enticing. After all who does not want to earn more? But, wait! Is it all worth it especially when it has not been even two years since you joined your present work-place? Such job offers or seeming opportunities could as well be a honey-trap if you bite the bait without assessing the pros and cons of your action. Any step taken in haste may as well translate into a difficult post-retirement phase with very little savings to fall back on to meet your essential daily and old-age health and other expenses. Is, then, job hopping, such a bad thing to do when a large section of employable young and mid-career professionals these days take it as a short cut to higher salary jobs and quick rise in life? Not in the least, if one does his or her homework well and chalks out an exit plan on the basis of existing financial standing to cope with the vagaries of a life after retirement.
Don’t hop, instead save!!
It has been established now that frequent job-changes have a debilitating impact on retirement savings. A study by ‘Employee Benefit Research Institute’ concludes: In 2008 the median job period of workers in the US was 5.1 years. The figure has since come down to nearly 4.4 years, as per ‘Bureau of Labour Statistics assessment’.
Frequently job-hopping? Face the music!
- Saving for retirement becomes difficult
- It means moving in and out of retirement coverage. Result: small nest egg
- In some organisations new employees need to wait before they can join retirement saving plan
- In some organisations 401(K) match schedules are meant to reward long serving employees, for job hoppers there is little to gain
- May have to forgo employer contribution to 401 (K): ‘Fidelity’ finding on the basis of analysis of about 500,000 retirement savers who quit jobs in 2013
- “Chronic job hopping could really sink your retirement savings,” cautions Meghan Murphy, a director at ‘Fidelity’
What Employers Want?
- Over one third of employers insist on employees continuing with them for at least 5 years to keep their full match: ‘Plan Sponsor Council of America’ finding.
- About 14 per cent of employers insist workers stay with them for a minimum of 2-3 years to get any money: Plan Sponsor Council of America finding.
- Important to go through current employer’s vesting schedule related to 401(K) and profit-sharing contributions
- Be wise: If waiting for a few more months enables you take thousands of dollars in saving then continue with the same employee till that time-frame
- Don’t hesitate to negotiate with new employer even if not fully vested in your 401(K). Tell them how you will lose in savings if you quit now
- Some employers may like to compensate for the loss by agreeing to pay higher salary or a signing bonus.
- It is recommended that job hoppers sock away 10 – 15 per cent of salary each year to insulate him or her against any unforeseen financial difficulties
- Plan your retirement well in advance
- Ideally start saving when in your 20s
Can Self directed IRA be saviour?
- In fact, all IRA are self-directed. So the use of word self-directed is redundant
- IRA or ‘Individual Retirement Account’ is a type of individual retirement plan
- Banks, brokers or similar financial institutions provide it
- It ensures tax benefits on retirement savings for taxpayers in the US
- Individual retirement accounts and broader category of IRA fall under it
- A trust account is set up for the only benefit of taxpayers along with individual retirement annuity
- Taxpayer purchase an annuity contract or an endowment from a life insurance firm
- Self directed IRA allows IRA account holders to invest in a broader range of alternative investments such as real estate, private mortgages, private company stock, oil and gas LPs, precious metals, horses and intellectual property
- While investing IRA assets into alternative investment it is imperative to select right self-directed IRA custodians
- Majority of custodians dealing in stocks, bonds and mutual funds are incapable of providing proper custody to alternative investments
- As per Internal Revenue Service (IRS) norms either a qualified trustee, or custodian, should hold the IRA assets on behalf of the IRA owner
- Custodian of a self-directed IRA may allow account owner access to a selection of standard asset types including stocks, bonds, and mutual funds
- Account owner can invest an investment that is not barred by Internal Revenue Code or IRC
This brings us to one pertinent question: Where should you save your retirement money? If you go by public perception based on real time experience then tax-favored IRAs and 401(k) clearly stand out as the most attractive propositions. Retirement plans allow retirees to defer taxes on the money saved and returns earned within account. This entails: contributed amount becomes tax free till one starts withdrawing it years later. In the process, more of your money earns you investment returns over a period of time.