Why Job Hopping Makes You Worse Off In Retirement

Career changers may have more difficulty saving enough

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Frequently changing employers can make it more difficult to save for retirement. The median job tenure of American workers was 5.1 years at the same job in 2008, according to a new study by the Employee Benefit Research Institute. Many pension formulas reward long-term and highly paid employees more than workers with a shorter job tenure. Some job hopping workers also move in and out of retirement plan coverage throughout their career and cash out small 401(k) balances when they change jobs, both of which lead to smaller retirement account balances.

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Short tenure on the job can reduce the traditional pension you will receive in retirement. “Since defined benefit pensions that are final-average plans have a formula based on tenure and average salary, workers who frequently change jobs will not receive the maximum benefit from this type of retirement plan because they do not remain with their same employer for an extended period,” writes Craig Copeland, the author of the study. “In fact, short-tenure workers with less than five years in a job may not qualify for any pension benefit at all.”

Workers saving for retirement in a 401(k) may also lose out by trading employers if they fail to save consistently or cash out their account balance. “If employees do not retain these assets in some type of savings vehicle for retirement, they may forgo an important source of supplemental income to their Social Security benefits or be forced to remain in the work force,” Copeland writes.

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Some 401(k) plans provide better investment options or charge lower fees than others. 401(k) match formulas also vary considerably among employers and short-term employees don’t always get to keep the 401(k) match. Only 37 percent of 401(k) plans offered immediate vesting in 2008, according to a Profit Sharing/401k Council of America survey of 908 plans, which means you get to keep your employer's match as soon as it is deposited. Other plans require you to stay with the employer a certain number of years before you can keep the match. Some companies also have a graduated vesting schedule that allows you to keep a certain percentage of your employer’s 401(k) match based on the number of years you have worked for the company. If you leave the company before the match is fully vested you forfeit some or all of your employer’s 401(k) contributions.

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The job tenure for males approaching retirement between the ages of 55 and 64 had declined steadily from a peak of 15 years in 1983 to 10 years in 2008, EBRI found. Among females the same ages median time on the job has gradually increased from 8 years in 1963 to 10 years in 2008. Public sector workers job hop considerably less often than private sector workers. The median private sector worker had been on the job just 4 years in 2008, compared to 7 years for those in the public sector. Only about 11 percent of all workers have been at their job 20 or more years in 2008.