You May Be Hurting Your Retirement Savings With This Sneaky 401(k) Mistake

Saving for retirement can be a massive undertaking. From knowing when, exactly, to start saving (hint: the earlier the better when it comes to retirement savings) to knowing what kinds of retirement accounts can best help you reach your goals, there can be a lot to consider. Having your own retirement accounts, either 401(k) plans through employers or personal Roth IRAs, can be especially important when you consider that Social Security's trust funds are currently on track to run out beginning in 2033. It's also worth mentioning that many of Donald Trump's potential second term policies could serve to speed up Social Security's insolvency. This means it can be more important than ever to prioritize your retirement savings accounts.

However, even if you start saving early, have a diverse set of retirement account types, and diligently contribute to your retirement accounts you could still find yourself falling short of your savings goals thanks to something you might not have considered before: job transitions. Changing jobs can have significant impacts on your long term retirement goals. This can be especially dangerous when you factor in just how common it has become to switch employers. In fact, according to a 2024 tenure report from the U.S. Bureau of Labor Statistics, the number of years that U.S. workers had been with their current employer dropped to just 3.9 years, the lowest since 2002. This means workers are spending less time with their employers, which can rack up a significant job count over the course of their career.

You might be surprised to learn just how many more jobs younger generations will have in their lifetime compared to the baby boomer generation. According to data from the Bureau of Labor Statistics, the average baby boomer had about 12.4 different jobs during the course of their career. With that in mind, almost half of these jobs were held before they turned 24, meaning that during the majority of their career they worked for around 6.6 employers. On the flip side, infographic data from McCrindle predicts that Gen Zers will have 18 jobs across 6 careers in their lifetime. The reason that the exact amount of jobs that young workers will eventually have is important has to do with retirement.

According to research from Vanguard, the median worker experiences a 10% increase in pay when they switch employers. However, they also experience a 0.7% decline in their retirement savings rate when they switch employers. This is largely due to the fact that the current way that 401(k) plans operate does not consider or account for multiple job changes. While 0.7% might not sound like a lot, it can add up, especially when factoring in just how many employer changes younger generations are anticipated to work for. According to Vanguard's calculations, a worker who begins their career earning $60,000 could end up facing retirement savings losses of $300,000 (or, the equivalent of six additional retirement years) from switching employers just eight times in their career.

By both the percentage data and overall money, workers experience slowdowns in their retirement savings accumulation with each job change (even those with an over 10% raise in pay). While the simplest answer could be to stick with one employer for the entirety of your career, that is increasingly unlikely not to mention antiquated. With that said, one potential way to help combat this slowdown is to pay close attention to the default savings rate for your retirement account. This can be especially true when transitioning to a new 401(k) plan with a new employer. The current default savings rate is generally 3%, which is fairly low and can further contribute to retirement savings slowdowns. According to Vanguard, raising your individual savings rate to 6% can help not just raise your overall savings floor but also help to mitigate the potential losses associated with switching employers.

As always, it's important to balance your current financial needs alongside your retirement savings. Making sure not to overemphasize future savings at the expense of your current needs can be incredibly important, especially in the face of prolonged inflation and growing credit card debt across the country. With that said, an increasing amount of Americans are concerned about not having enough money saved for retirement (according to a September 2024 Bankrate survey 57% of workers think they're behind), so ensuring you continue your retirement savings, even with increased prices, can be vital to your eventual retirement lifestyle down the road.