Don’t let changing jobs wreck your savings

Jean Chatzky TODAY Financial Editor • Profile • E-mail

I don't know about you, but as a kid, my career aspirations varied from year to year. In fourth grade, I was dead set on becoming a teacher. By fifth grade, I'd shifted my focus to culinary school. With that much time on your side, the possibilities seem endless.

But these days, it's not uncommon for adults to change companies, even careers, nearly as often. In fact, according to the Employee Benefits Research Institute (EBRI), the average job tenure is about four years.

Career experts say that, if the time is right, jumping ship is a good thing. "It's kind of like rebalancing your stock portfolio," says Cynthia Shapiro, author of "Career Confidential." "Look at the situation every three years and ask yourself if it is getting you where you need to go."

Interesting, considering that retirement investments all too often become casualties during a job change. Don't get me wrong, I'm all for making a switch. In many cases, your mental health depends on it. But here's how to keep your savings on track when you do.

Wait until you’re vested
We always say that there's no such thing as a free lunch, but one thing comes close: employer-matching dollars. To encourage their employees to save for retirement, most companies will cough up some cash, sometimes as much as 50 percent of your own contribution, to add to your account. But there's a catch: You have to be vested to keep the money they've contributed if you decide to move on.

According to Alison Borland of Hewitt Associates' defined contribution consulting division, about 44 percent of companies have programs that offer immediate vesting to employees, which means more than half don't. Commonly, companies will offer graded vesting over five years, which means if you leave after one, you'll get to keep 20 percent of their money. After two years, you'll keep 40 percent, and so on. At other companies, you're automatically vested after three years — leave before and you'll get nothing.

Don’t cash out
The first time I changed jobs, in my early 20s, my employer cut me a check for my retirement savings and I took it straight to the mall. The clothes I bought are long gone, and I don't even want to think about how much that money would be worth now had I kept it invested. Don't make the same mistake.

"If a lump sum is less than $15,000 to $18,000, there is a very high probability that it will be spent, not saved," says Dallas Salisbury, president and CEO of EBRI. In fact, Borland's research at Hewitt shows that about 45 percent of people who change jobs take the cash when they leave. Not only will this set you back in a big way when it comes to saving for retirement, but you'll also have to pay taxes and penalties for pulling out early.

That's not to say that you should leave the money with your old employer. It's hard to be sure

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a company will still be around 20 or 30 years down the road, particularly given this economy, so it's a good idea to keep your savings close. Check out the plan at your new job, and if it's not up to snuff, you have the option of rolling your savings into an IRA, where you have total control over the investment. Whatever you do, have H.R. at your old company send the money directly to your new account. If they cut you a check, the IRS assumes you cashed out and your tax bill will be sky-high.

Every little bit helps
There are a million excuses for delaying contributions, and I've heard them all. One of the biggest comes from 20-somethings in their first or second job. Because they don't plan on staying with the company for more than a few years, they snub their retirement options. They switch jobs, but decide to delay saving for retirement even further because they're still not quite settled. Suddenly, they're 30 years old without any retirement savings at all. This is a big mistake. The difference between starting your contributions at age 25 and starting at 30 is huge: If you invest $5,000 a year starting at age 25, you'll have almost $1.5 million dollars by the time you hit 65. Wait until you're 30 to start, and that number drops by nearly a third.

Read the fine print
Automatic enrollment is popping up at companies all over the country, and I have to admit, I'm a fan. Essentially, this means that by default, HR will assume you want to participate in the retirement plan, unless you tell them otherwise.

Typically, they'll start you off with a 3 percent contribution, and bump you up each year until you hit approximately 10 percent. This means not only are more people saving, but they are increasing the amount they're saving on a regular basis, something that many employees don't take the initiative to do on their own. Borland, however, points out one downfall: If you were comfortably contributing 10 percent, and your new employer starts you out at 3 percent, you have to take notice and up your contribution to stay on track, and unfortunately, many people don't.

"When employees are auto enrolled, they generally don't take action. So if they change jobs every five years and are pushed back to 3 percent each time, they've lost over 45 percent of their accumulated balance." The message here is clear: Every employer is going to be different, so double-checking never hurts.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, www.jeanchatzky.com.

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