NEW YORK (CNNfn) - That higher-paying job you just landed may be too good to turn down. But before you set sail for new water coolers, map out a leak-proof plan to protect your retirement savings.|
Otherwise, you may be throwing tens of thousands of dollars overboard without even realizing it.
You can take it with you
Take your 401(k), for instance. Or don't. But whatever you do, don't cash it out.
When you leave a job, you have to decide whether to:
- Keep your 401(k) with your old employer;
- Roll it over into a 401(k) plan at your new job or an IRA; or
- Put the money in your pocket and pay taxes on it. But remember, you have 60 days from when you receive your check to reinvest it in a tax-qualified savings plan if you want.
Experts strongly advise against option three because it's the least desirable from a long-term savings perspective.
"Leave the money in the system," said Paul Yakoboski, a senior research associate at the Employee Benefits Research Institute (EBRI). "If you don't, you pay the penalty tax as well as income tax. You don't walk away with as much as you think."
The same principle applies to a cash-balance pension plan or any portability option you may have under a more traditional pension.
Deciding between options one and two is a little trickier. You should compare the benefits of the plan you're in with the plans on offer at your new job.
Among the factors to consider, said Alan Glickstein, a principal at Kwasha HR Solutions, are:
- Performance - if you're already in a great mutual fund at your old job, it might be smart to keep your money where it is
- Cost - compare the fees of your old and new 401(k)s
- Fund choice - a new employer may offer a more limited scope of funds than your current one
- Return - when it comes to pensions, one employer might issue a less favorable rate of return in a cash-balance plan or use a less advantageous basis for calculating your annuity payments
- Manageability - would you prefer to consolidate your funds - and all the paperwork and passwords that accompany them? Keep in mind, too, that larger sums compound more quickly, said Clare Bergquist, the director of 401(k) communications at Strong Funds
If you do change plans, "make sure it's an upgrade," Bergquist said.
Accessing information on your investments is also a consideration. "Most people today expect 24-7 access," she added. "You want to be able to interact with your money in a way that makes you comfortable."
Time wasted, money lost
Still tempted to cash out because your savings barely rivals Bill Gates' yearly barber costs? Don't. Unless you're 10 minutes from retiring, that amount won't seem so small after 15 or 30 years of compounding.
Yakoboski said people often "fritter away a whole lot of their potential nest egg," especially when they're young.
EBRI statistics show that workers between the ages of 20 and 39 cash out their retirement plans more than any other age group.
Remember, too, that taking a new job usually means you must wait up to a year or more to contribute to your new employer's savings plan. You can't make up for the lag in matching contributions, but you can continue saving on your own. Experts suggest you put money into an IRA or some other tax-deferred account in the meanwhile.
And if you took loans out on your 401(k) at your old job, be sure to pay them back before going to your new position, said Gary Schatsky, president of the National Association of Personal Financial Advisors. Otherwise, the loan will be treated as a distribution and therefore subject to income tax and early withdrawal penalties.
Keep your vested interests at heart
No matter how antsy you are to quit, don't take a new position unless you know just how vested you are at your current company.
If you were fully vested from Day One -- meaning benefits like a 401(k) employer match are yours to keep from the start -- then you lose nothing by accepting another job, presuming it provides benefits of equal or greater value than the one you have now.
But if your company adheres to a six-year plan, for instance, in which you vest gradually until you reach 100 percent by your sixth anniversary, then what you stand to lose is determined by your tenure.
Likewise, some firms take an all-or-nothing approach -- or what's known as a "cliff" plan. Employees become fully vested only after a certain number of years. So if you're on a 5-year cliff plan, think long and hard about leaving before your fifth anniversary, because it means potentially losing up to five years' worth of 401(k) matching contributions or pension benefits.
"If you have a choice, pick a different departure date," Schatsky said.
But if you're really miserable at work, staying another year or two might not be worth it. So your best bet is to bargain for a better package with your new employer.
"Factor that lost money from not fully vesting into the new package. But realize, 'I am going to lose some money here,'" Yakoboski said.
To know your options is to love them
Vesting is also the No. 1 issue when you have stock options. If you are relying on them to contribute to your long-term security and are close to vesting, it may pay to stay in your current job as long as it takes.
"Stock options can overshadow the value of a retirement plan in a heartbeat," Schatsky said. "I've had clients who made millions by waiting a few weeks."
If you are fully vested when you accept a new position, keep in mind that you may have to exercise your options within 30 to 90 days after leaving your job, depending on your company's policy, he added.
Job-hoppers take care
For most of us -- those without windfall stock options or $1-million-a-year salaries -- building a nest egg is a little like nourishing a child. For her to grow into a healthy adult, you need to feed her lots of nutritional foods regularly. She can't afford to skip meals for a week here and there.
Likewise, your retirement savings will be malnourished if you change jobs so frequently that you never vest, or you don't trade up significantly enough to justify the moves.
At the same time, you need to keep pace with the job market. And mobility is a reality of the work force, especially if you're young.
There is a growing level of comfort among younger workers in walking away from a job, said Bruce Tulgan, founder of Rainmaker Thinking, a research firm focused on the working lives of those under 40.
"Today, the most mobile part of the workforce is the most marketable," Tulgan said.
But that mobility comes with added responsibilities -- to yourself.
"What (it) means is workers have to make the right decisions," Yakoboski said.