Changing jobs — whether it’s to pursue a different career path or snag a higher salary — is something most people do at some point.
Young adults are particularly receptive to the idea of switching things up, with 21 percent saying they’ve changed jobs in the last year, according to Gallup’s “How Millennials Want to Work and Live” report. That’s three times the rate of non-millennials.
Regardless of the reason for making a job change, there’s one very important thing to think about — how it could affect your retirement outlook. When a new employer means a new 401(k), certain adjustments may be necessary to keep your retirement plans on track.
Calculate how much of your salary you need to save. If your employer offers a qualified retirement plan that allows for elective deferrals, the first thing you need to decide is how much of your salary you plan to sock away.
[See: The 10 Best Times to Change Jobs.]
Figuring out how much you need to contribute to get the employer match is a good starting point, says Jessica Landis, director of financial planning at Janney Montgomery Scott in Philadelphia.
According to a 2015 Financial Engines study, employees that don’t chip in enough to get the match lose out on $1,336 in savings per year on average. That could add up to nearly $43,000 over a 20-year career.
If there’s no match available, employees may need to think beyond their employer’s plan to meet their retirement goals.
“Consider how much you want to save each year, what the fees are in your retirement plan and how the investment options compare to an IRA,” Landis says.
The higher contribution limits allowed with a 401(k) or similar plan give it an edge over a traditional or Roth IRA but these accounts can be useful for supplementing your savings when your employer’s plan doesn’t offer a match.
Don’t forget about your old retirement plan. If you’re going to work for a new company but you’ve still got a retirement plan with your old employer, you’ll need to give some thought to what you’ll do with it.
Deciding whether to roll your old plan over into your new employer’s 401(k) or into an IRA is one of the most critical choices you can make, says Thomas Lowry, a financial advisor and president of Atlanta-based Georgia Wealth Advisors.
“By setting up your own IRA with the old 401(k), you can give yourself more flexibility in terms of investment options, and you’d have more control over your retirement account,” Lowry says.
You should remember, however, that if you pull the money out before age 59.5, you’ll pay ordinary income tax on the withdrawals, as well as a 10 percent early withdrawal penalty. With a 401(k), you may be able to take a loan rather than a withdrawal. As long as it’s repaid on time, there’d be no tax penalty.
“If you roll the old 401(k) into your current employer’s plan, your deposits enjoy all the benefits of the new plan,” Lowry says, which extends to required minimum distributions.
If you’re still working for your employer past age 70.5, you wouldn’t have to take a distribution from your 401(k) but you would for any assets you’ve rolled over into a traditional IRA.
Tony D’Amico, CEO and lead advisor of The Fidato Group in Strongsville, Ohio, says there are other factors to keep in mind.
“There are pros and cons to consider, such as the quality of the investments in the previous employer’s 401(k), the expenses of those funds and how well those funds match your risk tolerance and life goals,” D’Amico says.
When rolling assets over, savers should analyze whether the fees of the new plan are appropriate and how the asset allocation aligns with their investment strategy.
[See: How to Max Out Your 401(k) in 2017.]
“Different asset classes have different risks,” D’Amico says.
He advises investors not to skimp on due diligence and to be cautious of funds with high expenses and investments that offer limited liquidity.
Ask yourself whether a Roth 401(k) makes sense. Traditional 401(k) plans allow for tax-deductible contributions and tax-deferred growth but a Roth 401(k) may be preferable if you’d like to make tax-free withdrawals in retirement.
Edward Dressel, president of Trust Builders in Dallas, Oregon, encourages savers to think in terms of diversification when contemplating whether to opt for a Roth 401(k) if one is available.
“When saving for retirement, diversification is important. It means not only including different types of funds in your account but also having pre- and post-tax assets,” Dressel says.
He advises that Roth accounts are beneficial for savers who anticipate landing in a higher marginal tax bracket in retirement compared to how they’re taxed during their earning years. For example, a Roth 401(k) may be a good option for younger workers who expect their income to grow as their career progresses.
Evaluate your investment options. Not all employer-sponsored retirement plans are created equally and if your new plan offers less-than-stellar investment choices, it can be frustrating to say the least. That doesn’t mean, however, that you should skip out on saving in the plan entirely.
“Always contribute enough to secure the maximum employer match,” Dressel says, to get the most out of the plan. Once you’ve done that, you can begin exploring other investment avenues.
Your employee benefits package could hold the key to a more comfortable retirement, even if your 401(k) disappoints, says George Clough, vice president of wealth management strategies at People’s United Wealth Management in Bridgeport, Connecticut.
“For example, a health savings account is primarily designed to help pay qualified medical expenses with tax-free savings,” Clough says.
Unlike a flexible spending account, which you have to spend down annually, the money in your HSA can accumulate from year to year. That could be significant if you have medical expenses that aren’t covered by insurance in retirement.
Clough also cites employee stock ownership plans, employee stock purchase plans and stock options as other benefits you could use to fund your nest egg.
D’Amico advises savers to examine how their investment choices fit within their larger financial framework, especially when 401(k) plan options are limited.
“If you retire at 65, with life expectances getting longer, the money will need to last you to 20 to 25 years or more,” D’Amico says.
[Read: Changing Jobs? Don’t Forget About Your Retirement Plan.]
Over an extended period of time, presidential elections and economic cycles may impact your investments. D’Amico’s advice for coping with a less than ideal retirement plan is simple: “Be prepared for the long haul.”
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How to Revamp Your Retirement Strategy When Changing Jobs originally appeared on usnews.com
