How Job Hopping Hurts Your Retirement Savings

People who change jobs frequently may come out behind in retirement.

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Baby boomers born between 1957 and 1964 held an average of 11 jobs between ages 18 and 46, according to a new Bureau of Labor Statistics analysis. Job duration increased as these workers aged, but they generally continued to have large numbers of short-term jobs even in middle age. Among jobs started by 40- to 46-year-olds, 33 percent ended in less than a year, and 69 percent ended in under five years.

Job hopping can hinder your ability to retire comfortably if you don't consistently save on your own. Many 401(k) plans have vesting schedules and other rules meant to reward long-term employees that often give short-tenured workers little or no benefit. Here's how job hopping can harm your retirement savings:

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Leaving before vested. Many employers contribute matching funds to employee 401(k) plans, but workers often don't get to keep that money until they are vested in the plan. Some companies don't fully vest workers in the 401(k) plan until they have been with the company for as long as five (18 percent) or six (14 percent) years, according to a recent analysis of more than 1,700 401(k) plans administered by Vanguard. Some companies allow workers to keep a gradually increasing percentage of the 401(k) match based on years of service, while other firms don't allow workers to keep any of their 401(k) match until they hit a certain number of years on the job. "Obviously, if you have an unvested match of any significance, it should be part of the decision-making process," says Jamie Milne, a certified financial planner for Milne Financial Planning in West Danville, Vt. "If you are three days away from it, hang in there for three days. If you are three years away from it, life needs to move on if you don't want to be there."

The temptation to cash out. Almost half (45 percent) of workers who withdrew money from a 401(k) plan in 2010 failed to roll it over to another retirement account, up from 40 percent in 2007, according to a Center for Retirement Research at Boston College analysis of the Federal Reserve Board's Survey of Consumer Finances data. Cashing out a 401(k) before age 55 will cause you to incur significant taxes and fees. For example, a person in the 25 percent tax bracket who withdraws $5,000 from a 401(k) will get to keep just $3,250 after paying income tax and a 10 percent early withdrawal penalty. People who take early withdrawals also miss out on the compound interest they could have accumulated between now and retirement. "I know it's tempting, but the most important thing is do not ever withdraw your retirement savings from the account," says Carol Ringrose Alexander, a certified financial planner and executive vice president of Retirement Investment Advisors in Oklahoma City. "Consolidate your account and move it to an IRA or your new employer if that plan will allow it."

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Roll-over gotchas. Once you decide to move your money, it's important to avoid taxes and penalties while rolling your money over to a new retirement account. It's generally best to have the money transferred directly to the new financial institution. If a check is made out to you, 20 percent of your account balance will be withheld for income tax. If you don't deposit the full amount, including the withheld 20 percent, in a new retirement account within 60 days, additional taxes and the early withdrawal penalty may be applied. "I always recommend that people directly transfer it to an IRA with some very cost-efficient and well-diversified index funds or exchange-traded funds," says Abigail Pons, a certified financial planner for Capella Financial Services in Bangor, Maine. "For people who have several job changes over a career lifetime, it can be very effective to start an IRA and then consolidate every time they leave an employer behind." If your new employer allows it, you may also be able to transfer the balance to your new 401(k) plan.