Avoid This Retirement Savings Mistake That’s Costing Americans Up to $300K
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Most people change jobs or even careers several times throughout their lives, often to make more money. For example, according to the Bureau of Labor Statistics, the average baby boomer has had around 12 jobs, while older millennials have had closer to nine.
While moving into a new position or switching companies altogether can be advantageous — more prospects, increased pay — it can also hurt your retirement savings. Do it too often, and you could lose as much as $300,000 in some instances.
A 2024 Vanguard report found that people who frequently job hop usually contribute less money to their 401(k) — and they don’t even realize it. While this might not seem like a big deal, it can end up costing someone hundreds of thousands of dollars — or roughly the equivalent of a new house in some parts of the country.
“The impact that a retirement savings slowdown can have on workers who switch jobs across employers is significant,” according to the Vanguard report. “For a worker earning $60,000 at the start of their career who switches jobs eight times across employers (for a total of nine jobs), the estimated loss in potential retirement savings could be about $300,000 — enough to fund an estimated six additional years of spending in retirement.”
As per Vanguard’s report, there are several reasons why people save less by job hopping.
Sometimes, they forget to sign up for a 401(k) plan with their new employer. Others, they end up auto-enrolled in a plan but with a lower savings rate. In some cases, they save less due to major life changes, pay cuts or emergencies that come up. Some people roll their old 401(k) plan into an IRA — individual retirement account — but never actually invest it.
Although U.S. workers get to keep their 401(k) plans when switching jobs, some simply lose momentum when saving for retirement. Even with potentially better pay or benefits, these don’t always make up for the long-term monetary loss. In fact, those who stick with one job or employer for a long time are more likely to save more over time than those who don’t.
Vanguard also found that the median job hopper sees a savings rate drop of almost 1% — even with a 10% raise. For someone who switches jobs every five years, their 401(k) savings rate can drop significantly, rather than steadily increase or at least remain the same.
To maintain savings momentum, a worker needs a 6% or higher “default savings rate.” But not every employer offers this.
“Although many plans are automatically enrolling their participants at a default rate of 6% or more, the most common default saving rate design is a 3% rate that automatically increases by 1 percentage point per year, up to a maximum of 10%,” according to the Vanguard report. This means several years where the savings rate is lower by default.
There is good news, though it’s primarily for those who stick with one job throughout their career.
“Starting in 2025, the SECURE 2.0 Act will require companies with new 401(k) and 403(b) plans to automatically enroll their employees into those plans at a minimum saving rate between 3% and 10% and increase the rate by 1% per year until it reaches 10% to 15%,” as per Vanguard’s report. “This design is effective if workers do not switch jobs and remain with one employer for their entire career.”
Some experts suggest setting aside anywhere from 10% to 15% of your annual income for retirement savings. In the case of 401(k) plans, this includes employer contributions.
The problem for those who frequently switch jobs — or rather employers — is that it can take years to boost that savings rate back to where it needs to be. And if someone changes jobs every few years or so, they might never get there.
Vanguard kept track of 54,793 employees who changed employers between 2015 and 2022 and got a new 401(k) plan administered by Vanguard. Here are some of the key findings:
64% of job hoppers received a raise, but just 44% kept or boosted their savings rate.
36% of workers received the default savings rate of 3% when getting a new plan. This was the most common plan design.
60% of workers with an automatic enrollment plan got their plan’s default savings rate, while just 40% chose a custom savings rate.
During their first year at the new job, more than half of those who chose their own savings rate still saved less than they had before.
Roughly 25% of workers didn’t sign up for a 401(k) plan that required manual enrollment.
Switching jobs may be worth it for some, but it’s crucial to consider the long-term repercussions on your retirement savings. To this point, Vanguard provided the following examples of what someone could save over the course of their career, based on their retirement savings choices:
Someone who earns $60,000 annually and is auto-enrolled at a 3% savings rate that increases by 1% per year to 10% would save roughly $800,000 from 25 to 65 years old. This assumes 50% employer-matching contributions for the initial 6% of employee contributions.
Someone who has eight jobs throughout their career and a savings rate that drops to 3% with each switch would have around $500,000 at age 65. This assumes a 50% employer-matching contribution and 1% annual savings rate increase.
The current 401(k) plan isn’t designed for job hoppers, at least not in most cases. It might be time for a change.
“The findings highlight a critical need for plan sponsors and policymakers to consider the impact of job switches on retirement security and to better accommodate the evolving career trajectories of today’s workforce,” according to the Vanguard report.
“This research serves as an invitation for more innovative and personalized plan designs, with particular attention to automatic enrollment features and their implementation. Such changes could better support workers in maintaining, if not accelerating, their retirement savings through their career transitions.”
In the meantime, if you switch jobs, pay attention to your 401(k) savings and, if you can, save the same percentage or more than you did at your previous job.
