Transcript

Job Switching and Your 401(k): How to Stay on Track with Retirement Savings

Table of Contents

• Introduction
• Effects of Switching Jobs on 401(k) Contributions
• Strategies to Maintain Steady 401(k) Contributions
• The “Saw-toothed” Pattern of 401(k) Savings
• Automatic Enrollment and Lower Saving Rates
• Impact of Life Changes on 401(k) Contributions
• Common Mistakes when Rolling Over 401(k) to IRA
• Role of Financial Advisors
• Balancing Short-term and Long-term Needs
• Closing Thoughts

Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora and I am here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: Good, Good.

Mike: Another beautiful Monday.

Madison: Yes.

Mike: Hey, and we got rain last night.

Madison: Finally, right?

Mike: Yeah. It’s been a long time.

Madison: Yes. All righty. So today we are going to discuss an article from the Wall Street Journal. And it is titled, “When Changing Their Jobs, Workers Neglect 401(k) Plans.” And this is by Anne Tergesen. Alrighty. So, like previous episodes, I will read a summary and ask Mike some questions. All right, so here is the summary. The article discusses how switching jobs, while often beneficial for salary growth, can negatively impact retirement savings, particularly in 401(k) plans. According to research from Vanguard, many people fail to maintain or increase their 401(k) contributions after changing jobs. Some forget to enroll in their new employer’s plan, while others are auto-enrolled at lower savings rates. This can lead to a significant reduction in retirement savings over a lifetime-up to $300,000 less than average earners. Even though 401(k)s were designated to be portable, the study shows that workers who change jobs often experience dips in their contribution rates, which can allow a “saw-toothed” pattern of up and downs. Vanguard found that 64% of job-switchers received a raise, but only 44% maintained or increased their savings rate. The article highlights the long-term cost of not maintaining steady contributions as well as the challenges workers face in staying on track with their retirement savings during job transitions. It also discusses potential solutions such as auto-enrolling workers at higher rates and allowing employers to carry over contribution rates from previous jobs. All right, Mike, so how do you think switching jobs affects people’s ability to maintain steady contributions to their 401(k) plans?

Effects of Switching Jobs on 401(k) Contributions

Mike: Well, apparently it’s a big deal. I mean, this article was kind of shocking. It’s, you know, the article came out about five weeks ago and I reread it this morning. Thanks for getting that to me. And that was surprising. You know, like you would think people switching jobs for more pay would at least maintain, with their contribution rate, if not increase it, but that is not the case. So it’s surprising. You know, I think that one of the things they said in the article is, you know, switching jobs is such a big overhaul in your life for a lot of people. Even though people do it fairly frequently, it’s such a big thing that the 401(k) kind of gets lost. And they either don’t do it so that it default sets in, or if the employer doesn’t have the default, you know, maybe they save nothing. So, yeah, it’s apparently a big deal.

Madison: Yeah. All right, so why do many job switchers fail to sign up for their new employers 401(k) plan or end up with lower saving rates after a job change?

Mike: Yeah, I think they don’t get around to it. You know, we have some people, some clients, who are like very, you know, they get into the part of their career where they can save the max. So they’re really good at remembering that. And so they say, okay, well, I could save $23,500 this year or 30,000 depending on their age. So they do that. But for a lot of other people, you know, you forget what you’re saving. Right. If you’re saving six and a half percent of your salary and you go to sign up for a new one, you might not remember what you were doing before. Right. So you think, okay, well, maybe 5% is okay and maybe 5% is okay, but it’s not okay for most people. So, yeah, I think that with everything else, the 401(k) contribution rate is kind of like the forgotten piece in transferring to a new job.

Strategies to Maintain Steady 401(k) Contributions

Madison: Okay, all right. The Vanguard study suggests job switchers can end up with significantly less retirement savings over their careers. What are some strategies to avoid this?

Mike: Sure. When you’re, when you’re switching jobs, you have to pay attention. Like, what were you saving before? Was that enough? And if you’re getting a raise, should you do what you’re doing before or should you do more? Right. It’s so shocking that so many people get a raise and then contribute less, they must see the big difference in their paychecks. And I guess it doesn’t spur them to take that action, I guess. You know, a lot of people are struggling and a lot of times it’s hard to pay for the things that you need to pay for. And so maybe some people are taking as a time to reassess and like, okay, well, I’m going to pay off these other bills or I’m going to do these other things with my extra cash flow. And I understand that. But, you know, it’s something you might be disappointed in 20 years later when you retire, like, oh, well, I have $300,000 less than I would have if I just maintained the savings rate I had before. $300,000 is a lot of money for most people. You know, that’s a shocking amount to be short in your retirement, you know, and that’s based on like middle class earnings, median earnings. That’s not based on somebody making $500,000 a year, that’s based on somebody making like in the high five figures. So that’s a lot to be sure.

The “Saw-toothed” Pattern of 401(k) Savings

Madison: Yeah. Oh yeah. All right. So how does the “saw-toothed” pattern of 401(k) savings described in the article differ from the steady increase financial advisors typically recommend?

Mike: Sure. So, the “saw-toothed” pattern is, you know, people start to increase their savings, they’re at a job, they increase the percentage a little bit every year, every other year and then they switch jobs and it goes back down to the default rate or if there’s no default rate, maybe less. And then you know, they’re there for a little bit and it starts to increase again and then they switch jobs and it goes back down again. Whereas, you know, financial advisors would recommend, you know, contributing at a rate that, that will work for retirement and understanding that in the beginning of your career you’re also like saving for a house, paying down student loans, maybe paying for childcare. Like there’s a lot of expensive things that are really hard in your 20s, 30s and 40s that, that get easier over time as you have time to earn a living and increase your non-retirement savings and pay for things that don’t have to be repeated all the time. You know, when you buy your first house and you have to fill it with furniture and you have to buy tools and stuff for working around the garden, a lot of this stuff is expensive and you know, frankly you don’t have to buy it too many times. And so we understand that some of those costs are going to be a lot in the beginning. And so like everybody can’t always necessarily save 20% of their pay or 15 or even 10% of their pay. But over time I think most financial advisors would say as some of those one off costs, as you pass them, it’s time to increase your savings. And as you increase your pay, any of your pay that increases above what you need to just keep it with inflation, some part of that should probably be saved. You know, I remember years ago somebody said like if you, if you make, you get a 3% raise, well one of that, 1%, of that should go towards, you know, your non tax, you know, non tax deferred savings, like your regular savings, 1% of it or 1/3 of it should go to your retirement savings. The other 1% is, you know, like, to increase, like, your regular cash flow. Right. So some things are easier for you. And that always kind of made sense to me. You know, it, you know, the saving has to be good and a little bit hard, but not onerous. Right. Like, it can’t be just brutal, I don’t think. And so, yeah, so that is very different than a “saw-toothed” thing that actually happens for so many people. Again, the article is shocking to me. I’m glad that we found it. Thank you.

Automatic Enrollment and Lower Saving Rates

Madison: Yeah, of course. So what role does automatic enrollment at lower saving rates play in the decline of retirement savings for job switchers? And should employers be more proactive in addressing this issue?

Mike: Yeah, that’s hard to say. Right? Like, nobody likes being told what to do. Your new boss has already given you all kinds of stuff. You know, the setting the defaults was a nudge that was thought up by behavioral economists. And it’s a way of getting people to automatically enroll instead of having to take a step to enroll and setting a default at 3% instead of zero. So it’s better than it had been before. And I don’t know if it makes sense to increase that or not. Or maybe employers should have conversations with their new employees to say, like, hey, are you saving enough? Right. As an employer, I don’t want my employees to have, you know, giant financial concerns or to make big financial mistakes. You know, I like to, you know, I have great employees. I want their lives to be good. I like to help any way I can. So, yeah, it’s a good question. I think the nudge from the employer is better than just trying to auto enroll at a higher rate, but it’s hard. I don’t know what the right answer is, really.

Impact of Life Changes on 401(k) Contributions

Madison: Okay. What impact do life changes, such as pay cuts or new personal priorities have on 401(k) contributions after a job switch?

Mike: Yeah, they have a big impact. Right. Like if you lose your job and you had a new, you know, the study or the survey talked about people switching jobs and, you know, 2/3 of them got higher pay. Well, that means one third of them had the same or lower pay. Right. So not all job changes because the employee wants it. And so if you’re going along and you’re saving a certain percentage at a certain salary and then you lose that job and then you have to take one that’s lower paying, it’s understandable that your 401(k) contribution is going to decrease. You know, people have to figure out what they need to do in their circumstances. Now, I think the problem can be that the 401(k) contribution is like in the future for people and sometimes in the distant future, and so other priorities in their life take control. So, if you need to make your mortgage payment and a car payment and your student loan payment and save for retirement and then you’re making 10% less or 15% less, you know, you can’t pay 15% less of your mortgage. Right. So you could see why that happens. And it’s unfortunate, but it’s understandable too. Right. You know, you have to pay your bills.

Common Mistakes when Rolling Over 401(k) to IRA

Madison: Yeah, yeah. What are common mistakes people make when they roll over 401(k) funds into an IRA? And how can they avoid them?

Mike: Oh, that’s a good question. Totally off the track of everything else here. So, yeah, people make all kinds of mistakes. So sometimes they don’t do anything with their 401(k) at their old job, and they just keep it there and then forget it, neglect it. And that happens a lot. When we have new clients come in, they often roll over half dozen or more 401(k)s because they switch jobs every few years and don’t do anything. So that’s a bigger problem because at least when you roll your 401(k) into an IRA, you’re taking an active step to do something. But one thing we found is that a lot of people just don’t know and don’t understand, and so they don’t do anything. They think that their investments in their 401(k) are just going to automatically go to their IRA and they don’t. People wind up having cash in their IRAs for years because they don’t understand or don’t realize. And again, like, people are busy. There’s a lot of stuff to do, and, you know, it just doesn’t get looked at. I mean, some other things, other mistakes they make are, like, not diversifying. You know, they’ll buy, like, one fund because they hear something good about it or it’s recommended by a neighbor or something. Yeah, I mean, I think those are really the two big things, like not investing at all. Or then when they do invest it, not investing according to any kind of like a plan or strategy.

Role of Financial Advisors

Madison: Okay. All right. How can financial advisors help clients avoid the pitfalls of falling behind on retirement savings after switching jobs?

Mike: Yeah, so financial advisors should talk to their clients when they switch jobs to make sure that their savings are on track. Right. Because, you know, we can’t know the future necessarily. But if we have a client who’s 49 and they just change jobs and they want to retire at 65, we have a pretty good idea of how much they need to save over that time. Like, we could be pretty, pretty good about that. And it’s not just, oh, save everything you can. We could put good numbers on that. And so I think that for clients who don’t have an advisor, you know, they need to figure that out themselves. And some certainly can, and some are good at it and others probably could use some help and having some financial advice either from time to time or with ongoing financial advisory services. Yeah, it’s something we could help with a lot. And you know, in addition to like getting the number right, it provides a lot of peace of mind if somebody’s, you know, 15 years from retirement and they’ve just been saving for the last 30 years and they’re good at that, and maybe they make a pretty good amount of money too. I think it provides a nice peace of mind if somebody says to you, okay, well, you’re on track and these are the things you need to do to make sure that you’re in pretty good shape. And I think people like that. Right. It’s nice to know that you’re doing the right thing. It’s good to have somebody else who does it for a living say, like, hey, yeah, you’re on track.

Madison: Yeah, that can make all the difference.

Mike: It could.

Balancing Short-term and Long-term Needs

Madison: All right, so the article highlights the long term financial impact of slowing retirement savings. How should job switchers balance the short term needs of a new job and the long term needs for retirement security?

Mike: Yeah, well, I think the first thing is actually thinking about it and weighing the pros and cons of your different decisions and, you know, coming up with a plan so you know what you’re doing is the right thing. I think what the article kind of says but, doesn’t really get into is that I think for a lot of people, they just overwhelmed. A new job is hard. You need to sign up for you know, your new insurance, all the other benefits. You have a new schedule. You might be going into the office instead of working from home. You have all this stuff going on and the 401(k) just, you know, pushing a couple buttons, you know, and people don’t get to it. Yeah. So I think the big thing is, take a look at it. If you’re switching jobs and it’s because it’s something you want to do, well, then you should have a plan. Right. And then if you’re switching jobs and it wasn’t your choice, well, again, you need to figure out, like, how to best help your situation. And, you know, maybe that means spending some time on it, running some numbers, thinking through things, doing some research, but, you know, it’s better to do that than to get to be 65 and wind up being short and, you know, realizing you have to just have to work for indefinitely or longer.

Closing Thoughts

Madison: Yeah, absolutely. All right, Mike, is there anything else you want to add to this article?

Mike: Yeah, so just thinking that you’ve never done this. Right. You’ve never switched jobs and had to switch. Right. This is your first 401(k). And hopefully we’ll make things good enough here for you that you never have to do that and you just keep growing that money and retire rich lady one day. This was great. Thanks, Maddie. This is a good, good choice on articles. I had forgotten how surprising these Vanguard findings were.

Madison: Yeah, the numbers were definitely very significant.

Mike: Yeah. Startling to me.

Madison: Yeah. Like, almost hard to believe. So if anyone’s interested on reading that article, you can always find it in the description below. For more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to smash the like button if you enjoyed this episode. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.