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A common misstep for job switchers can significantly impact their retirement savings. While a new job often comes with a pay increase, many people inadvertently lower their 401(k) contribution rate when they transition. This seemingly small change can have a substantial negative impact on long-term financial security.
The research from Vanguard reveals that the typical job switcher's retirement saving rate decreases by 0.7 percentage points. This may not seem like much, but over time, it can lead to a significant loss in potential savings. The study found that even those who experience a substantial pay increase may still reduce their saving rate.
One of the reasons for this decline is the default contribution rate. Many 401(k) plans have a low default rate, often around 3%. If job switchers don't actively set a higher contribution rate, they may end up saving less than they intended.
The impact of this mistake can be substantial. For example, a worker who switches jobs eight times over their career could lose out on an estimated $300,000 in retirement savings. This is enough to fund an additional six years of spending in retirement.
To avoid this costly mistake, job switchers should aim to maintain or increase their 401(k) contribution rate when they start a new job. This can be done by setting a specific contribution percentage and ensuring that it is automatically increased over time. By taking these steps, job switchers can protect their retirement savings and achieve their long-term financial goals.