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Remember the good ole days when a person went to work for one company straight out of high school or college and walked out 30 years later with a gold watch and a pension, paving the way for an easy retirement? Probably not.
Those days are long, long gone. Today’s older workers have changed jobs more than 11 times during their working lives. They job-hopped five or more times in the early years of their careers as they looked to improve their pay and position.
You’re probably on a similar track. And while we certainly won’t fault you for working toward your dream job, you need to be aware that all those job changes can have a negative effect on your retirement savings—especially if you rely solely on a 401(k).
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Stop-and-Go Investing Is Never Good
Think about it: Most employers require you to wait anywhere from three months to a year to participate in the company’s 401(k). After that, it may take several months for you to become vested, meaning all the money in your 401(k) is actually yours to keep.
If, as the U.S. Department of Labor estimates, the average worker changes jobs 11.3 times over a 28-year career, then the average time at any one job is less than two-and-a-half years. So at most, the average worker has a couple of years to contribute to his 401(k) before he takes a new job and has to start all over again.
That’s if the new employer offers a retirement plan—many don’t.
The Impact to Your Nest Egg
Let’s throw some numbers around to see how this might affect your nest egg. We’ll say you always land a job that offers a 401(k), and you only have to wait six months to begin contributing with each new job. That would add up to about 66 months, or five-and-a-half years that you are not contributing to a 401(k).
If you make $40,000 and invest 15% of your income in your 401(k), you would end up contributing $33,000 less to your retirement savings than if you had been consistently investing throughout your entire career. That’s $33,000 that will not experience compound growth, potentially reducing your nest egg by hundreds of thousands by the time you retire.
Consistent investing over the long term is the best way to build up a retirement fund. Stopping for any reason, whether it’s for a job change or because you’re spooked by stock market swings, will reduce the amount you’re able to save as well as your investing returns.
An Easy Solution to Fill the Gaps
So how can you keep your retirement savings consistent even when your job situation isn’t? The answer to your problem is a Roth IRA.
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We’re not saying give up on your employer’s 401(k). The employer match is too good a deal to turn down. But you can contribute to a Roth IRA whether or not you have a 401(k).
Your goal is to invest 15% of your income toward retirement. When you have a 401(k) and an employer match, contribute enough to the 401(k) to receive the full match. Then invest the rest in your Roth IRA. When you don’t have a 401(k), increase your contributions to your Roth IRA to maintain your 15% retirement savings goal.
And don’t forget—you can roll over the balances of your old 401(k)s into your Roth IRA. This will make it easier to keep up with your retirement accounts and give you more control over which mutual funds you invest in. A rollover can also affect your income taxes, so talk with an investing advisor before you roll over any old 401(k) balances.
Put an End to Your 401(k)-Hopping Days
Contact an experienced investing advisor for help opening your Roth IRA, setting up your automatic contributions, and handling any old 401(k) rollovers. Later your advisor can help you adjust your contributions based on your job situation.
Don’t let your efforts to reach your career goals keep you from reaching your retirement savings goals. Get your Roth IRA started today!