Do you know how 401k matching works? You want 50% or 100% returns? It’s easier than you think, if you know how to work the job benefits properly. Unsure how this all works? Read.
Starting a New Job? How Not to Lose a Fortune in the Process
Are you planning on starting a new job in the near future? Have you already made your move? Congratulations! This is an exciting time for you.
In all the excitement and the various transitions going on, it’s easy to accidentally leave money on the table at your old company. There is a 4-step checklist you can follow when switching jobs to prevent that from happening. Taking these steps can be worth tens or hundreds of thousands of dollars over your lifetime.
Be Strategic in Your Decision-Making
If the company makes contributions to your account, there may be a vesting schedule that determines how much of those contributions you “own.” Many vesting schedules increase your ownership over time, on predetermined dates. For example, your employer contribution could vest 25% per year on the anniversary of your hire date. If you quit one day before your 4th anniversary, you’d only get 75% of that money instead of 100%. To paint that picture more clearly, let’s add some specifics.
Let’s say your salary has been steady at $50,000 and you put 3% of your salary into the 401(k) — and your employer matches that 3%. In 4 years, the company has put about $6,000 into the account. Assuming a 10% annual return on your investment, that’s about $7,600. If you resign the day before the last 25% vests, you lose out on $1,900 of that money.
And consider this: $1,900 invested over 30 years (as it sits in your retirement account) with a 10% annual return grows into about $30,000.
That’s a lot of money to give up for one day.
It’s also worth noting that some companies only disburse their contributions a few times a year. You may want to think about sticking around until that payment hits your account before quitting. (Additionally, you may have company stock or options vesting at a certain date. Keep those dates in mind when you’re switching jobs, too.)
Number 2: Plan to speak to a financial advisor about your rollover options. There are more alternatives than you may think! Of course, you could roll it into the 401(k) at the new job. You can also move the money into an individual retirement account (IRA) or start a new Roth IRA. There may also be the option to do what’s called an “in-plan Roth conversion”. If you don’t know what these are, best to speak to a financial planner.
Or you can leave your money in the 401(k) from the old job.
There’s no one-size-fits-all solution that works best for everyone in every situation. That’s why it can be helpful — and profitable — to meet with a financial advisor who can walk you through the alternatives.
The difference could be worth a fortune over time.
Number 3: Make the move (intentionally). While you have the option to keep your money in your old 401(k), that gives you one more thing to keep track of until you retire. And if you switch jobs again in the future, you could be juggling multiple retirement accounts with different companies — not to mention different performance and fees.
Again, it’s a good idea for most employees to speak with a financial professional before making a choice. Most importantly, don’t forget about that account or lose track of it before you can withdraw the funds. It’s your money. You earned it. You should get to enjoy it.
You can keep track of your money with the help of a financial planner or a platform like Freeman Capital.
Number 4: Continue funding your future on the new job. Most advisors will encourage you to take full advantage of the company match if one is available. In most cases, that benefit maxes out at 3% of your salary. But even if you decide not to contribute that much, it’s wise to put away something. Even a small amount can grow into a sizeable chunk that you’ll be thankful for in retirement.
If you invested, say, $200 a month into a 401(k) or other retirement account, how much would that grow by the time you’re ready to retire?
Play around with this retirement calculator and you can see how you can turn small contributions into tens or hundreds of thousands of dollars with compound interest and time.
Freeman Capital Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.