While some people choose to stay at the same job for their entire career, others have a habit of changing jobs every year or two. This habit is known as job hopping.
Job hopping may not be a bad thing if you are young and the positions you hop to are higher paying or with better benefits. However, there are times when job hopping can be harmful to your retirement savings.
Should you choose to leave your job after only a year or two, you may think you should simply cash out your 401(k) when you leave. Think again.
Cashing out your retirement plan early means you may only be able to receive a portion of it. The reason for this is because early withdrawal usually causes you to incur penalties and fees. A couple of better options would be to move it with you to your new employer, if they allow it, or to roll it into an IRA.
Not Being Fully Vested
When you are investing in a 401(k) plan, it usually takes three to five years before you are fully vested. If you choose to leave your current employer and go to work for a different company or become self-employed before you are fully vested, you may only be able to take a portion of your 401(k) with you. Also, there are some employers who will not allow you to take any of your 401(k) until you are fully vested. Before you announce that you are quitting it could be worth thousands to check the facts about your 401(k) vesting.
Some employers will not allow you to begin investing in a 401(k) plan until you have been with them for a certain period of time. This can range anywhere from a few months up to a year. This means your new employer might not allow contributions for several months. This could cause you to miss out on contributions you could have made with your previous employer in addition to contributions your employer could have made on your behalf. In addition, you would also miss out on any growth your investment could have made during the waiting period with your new employer. Adding up all of those missed investment dollars could total into the thousands.
Putting Off Investing
Another way job hopping can be harmful to your retirement savings is if you put off setting up your 401(k). It is easy to get busy and forget to complete the necessary steps to set up your retirement account. There are some employers who automatically start an account for you. But, you usually still have some investment options that require you to make choices within your account. Not completing the process could cost you investment money you will miss out on.
As you can see, there are several ways job hopping can be harmful to your retirement savings. It might be wise to run the numbers before you make a decision that could cost you thousands.
Can you think of other ways job hopping is harmful to your retirement savings?