Switching jobs and looking to save for retirement? Figuring out how much to save, avoiding high fees, and using tools and calculators can help remove the gues
Trends come and go, but one trend that seems to be continuing is job-hopping. It wasn’t too long ago that the American Dream involved getting on with a company, working for 40 years or so, and retiring with a defined-benefit plan such as a pension.
Today’s graduates routinely change jobs several times in their first 10 years in the workforce. Some studies estimate that Millennials will hold between 12 and 15 jobs in their lifetime. Plus, fewer and fewer companies are offering pensions these days and are instead migrating to 401(k) and other defined contribution plans.
All this labor mobility has plenty of benefits such as flexibility and workplace efficiency, but how might this job-hopping trend be affecting retirement savings trends? Here are three considerations:
Read on for more on these three considerations, and why they matter, as you hop along your career path.
If you’re like most Americans with 401(k)s, chances are the answer is “not likely.”
The Plan Sponsor Council of America, a trade group representing employers who offer retirement plans, said in December that the average salary deferral (pre- and after-tax) for all eligible participants in retirement plans was 6.8%.
That’s a far cry from the 15% recommended by the Center for Retirement Research as the amount sufficient to achieve retirement income targets. The good news is there are many online retirement calculators that give ballpark estimates of how much to sock away. By plugging in your current age, desired retirement age, current income, current savings rate, and a few other numbers, these calculators can estimate amounts to consider to contribute as you aim for your retirement goals.
Better yet, consider making retirement goal planning part of an overall financial plan.
But watch those fees. The U.S. Department of Labor, which mandated greater fee transparency in retirement plans, did the math, and published it in its 2013 report, A Look at 401(k) Plan Fees. From the report:
“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.”
How can you tell if your plan has high fees or low fees? Morningstar’s retirement expert Christine Benz said there are two sets of plan fees: the fees associated with the specific investment choices and total administrative costs. The fees for investment choices should be easy to find, while the administrative costs are in a document called the Summary Plan Description. How much is too much? Benz says, for an equity fund, a high-cost plan is one that charges above 1% in annual costs related to specific investment choices. For a bond fund, the rule-of-thumb is 0.75% annually. And for those administrative costs, she says plans with administrative costs over 0.5% annually are generally considered expensive.
Have you joined the job-hopping set? You can make sure your money follows you, or at least you know where it is. When leaving an employer, consider boxing up both your belongings and your 401(k). To keep your retirement money growing, one choice is a rollover into an IRA. An IRA custodian can walk you through how to request the distribution from your 401(k) plan administrator to transfer the funds. The two most common types of IRAs involved with a rollover are the Roth IRA and the Traditional IRA. Each has its own advantages, and the IRA custodian can explain the choices you have. To find out more about your options when leaving your employer, visit TD Ameritrade's Rollover IRA page.
A big reason to roll over your 401(k) instead of cashing out? Taxes. By rolling over the funds directly into an IRA versus cashing out, you avoid a mandatory 20% withholding for federal taxes, plus potential state and local taxes. Those under age 59 1/2 who cash out will also lose another 10% due to an early withdrawal penalty (except under certain specific exceptions).
Experiencing different companies, and even different careers, can be fun and liberating, but consider the impact on your money and investments as you hop along.
Get up to $600 when you roll over your old 401(k) with TD Ameritrade, depending on the size of your deposit.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.