As employment in the U.S. begins to recover following the devastating job losses incurred during the first few months of the pandemic, some younger adults are now seeing their job searches bear fruit. In the second of a two-part series, Retirement Director Ben Rizzuto outlines three steps to help those who have recently started new careers stay on track to their long-term financial goals.
Even though the U.S. job market has seen significant ups and downs over the past six months and many are still struggling to find a job, some media outlets have suggested that 2020 is the year to switch jobs. In fact, both The Wall Street Journal and Business Insider published articles over the summer supporting the idea of changing jobs despite the economic uncertainty related to COVID-19.
In last week’s blog post, I covered some ideas younger folks should consider if they are looking for a job in today’s challenging market. Today, I’ll outline three things those who have landed that new job should do from a financial standpoint.
If you’re fortunate enough to be among that group, while you may be thinking about updating your wardrobe and social media profiles – both good ideas! – there are some equally important financial steps you should consider taking to make sure you stay on track to reaching your goals.
Your Previous Employer’s Retirement Plan
The average American will change careers five to seven times during their working lives. And younger employees, perhaps due to the ever-growing number of career choices and increased flexibility they’ve grown accustomed during their time in the workforce, are even more likely to switch jobs. A 2016 Gallup poll found that 21% of millennials – born between 1980 and 1996 – had changed jobs in the past year, which is more than three times as often as non-millennials who reported the same.1
If you’re among the many job-hoppers out there and your previous employer offered a retirement plan, it’s imperative that you check whether there is money in the account that can now be rolled into your new employer’s retirement plan. Although there's no penalty for leaving your plan account with an old employer, over the course of your career you may lose track of assets left in previous plans.
A direct rollover is the easiest way to get assets from an old 401(k) into a current employer’s plan. First, you’ll want to reach out to your new employer’s plan administrator (recordkeeper) to get instructions on how the check or wire should be made out, what information to include and where it should be sent. Then you’ll need to contact your former employer’s plan administrator. If you’re not sure who it is, reach out to your company’s human resources or employee benefits group.
When contacting your former employer’s plan administrator, let them know that you’d like to do a direct rollover into your current employer’s retirement plan. You’ll need to complete a few forms, which will instruct the plan administrator to send a check or wire for your account balance to your new account provider.
If your new employer does not offer a retirement plan, you could choose to leave your account with your former employer, which will allow the assets to continue to grow tax deferred. However, you won’t be able to add assets to the old account going forward. The other option is to roll the assets into a traditional IRA. Assets in the IRA will continue to grow tax deferred and you’ll be able to contribute to the account and have control of how assets are invested. Before doing so, be sure to take the time to research the fees and expenses associated with these accounts.
The main goal is to make sure you keep track of your savings, continue to invest regularly and continue to enjoy tax deferred growth.
Your New Employer’s Retirement Plan
Assuming your new employer offers a retirement plan, the next step is to make sure you enroll as soon as you are eligible to ensure you can get started with your systematic savings. You should receive information on enrollment (which will most likely be done online) from the HR or benefits group at your new employer.
There are a few things you’ll need to do when you first enroll: First, you will be prompted to set a “deferral percentage.” This the percentage of your paycheck that will automatically go into your retirement plan account. This could be before tax if you use a traditional 401(k) plan or after tax if you choose to go with a Roth 401(k) plan. (Note that not all plans will have a Roth option.)
Next, you’ll need to determine how much to defer – a decision many people struggle with making because they’re unsure what the “correct” amount is.
There is no correct amount because everyone’s situation is different. However, we in the retirement industry typically suggest that folks should be saving around 15% of their paycheck in order to better ensure a comfortable retirement. If that seems like too much based on your current situation and fixed expenses (i.e., rent, utilities, etc.), I would encourage you to defer at least enough to receive a full match from your company. Company match percentages usually range from 3%-6% and each plan will be different depending on how they calculate this amount for employees. Some companies will match 100% on the first 5% of employee deferrals whereas others match 50% on the first 6% of employee deferrals. Be sure to ask your HR/Benefits group what your company’s matching policy is. You don’t want to miss out on what is essentially “free money” that your company will automatically contribute to your account.
Another thing to consider when you’re selecting your deferral percentage is the “auto-escalation” feature that is available in most 401(k) plans. This option allows you to automatically increase your deferral percentage every year by a percent or two. It’s a great way to consistently save a little bit more and not have to remind yourself to do it. Along with that, the incremental nature of the increase is designed to help ensure it won’t lead to a significant drop in your take-home pay.
Finally, you’ll need to select how the assets that go into your account will be invested. Your retirement plan will offer several different investment options, probably mutual funds, that will provide access to equity, fixed income or diversified investments. There are any number of ways to create your allocation. If you don’t feel comfortable selecting investments, you can select a diversified option like a target-date fund. If you’d like to select individual funds in order to create a more personalized allocation on your own, be sure to create something that is in line with your time horizon and risk tolerance. Generally speaking, the younger you are, the more time you have to save and invest, which means you can probably afford to take on more risk at this stage.
Your Financial Plan
Finally, as you start your new job it’s important to review your current financial plan. This should include a thorough review of your budget. Your new job may come with a new (possibly higher) salary but it could also include new expenses, such as travel, commuting or home office costs. Also, if you’re making more money at your job, you should think about whether you want to save some of that new income or put it toward a specific goal, such as a down payment on a house or paying down student loan debts. If possible, utilize automatic payments to consistently save toward goals or pay down debts. Either way, it’s a great time to review income, expenses, debts and goals.
A new job is an exciting step forward. Unfortunately, many of us fail to take the steps outlined above because we get too caught up in the excitement, the nerves and everything else that goes along with a big life change. But as we take these steps forward, it’s important to review where we’ve been and where we are headed. By doing so, we can better ensure that we build on the savings we’ve accumulated in the past as well as stay on the path we’ve laid out for our financial futures.
Marching to a Million: The Millennial Journey to Retirement
Resources to help engage clients' children and prepare the next
generation for retirement.
1Schrodt, P. “How to Switch Careers Even if You Think It's Impossible.” Money, September 29, 2020.
Subscribe for relevant insights delivered straight to your inbox