Millions of Americans rely on their 401(k)s to ensure a comfortable retirement, but new research from Vanguard shows many workers may be falling into a common pitfall. , it turns out you can miss out on thousands in savings, even if it’s the same amount. As $300,000.
The issue revolves around a typical experience for American workers: changing jobs. When people take a new job, they often get paid more, but they also often make the mistake of enrolling in a new 401(k) plan with a lower contribution level than their previous employer. .
As a result, the irony is that while many Americans enjoy higher incomes by changing jobs, they often end up saving less in their 401(k)s, stunting the growth of their nest eggs. Vanguard researchers found that one reason for this has to do with the fact that the most common default savings rate for 401(k) plans is 3%. Therefore, when workers change jobs, many will automatically enroll at that rate. I saved at a higher rate at my previous employer.
The result is a pattern of lower savings rates when people change jobs, says Vanguard Global Head of Investor Research and Policy, who shared a report that analyzed retirement and income data for more than 50,000 people who changed jobs. Author Fiona Greig pointed out. .
“Sure enough, most people change jobs for a pay rise, and the typical pay rise was 10%,” Greig pointed out. “Although 64% have increased their salary by changing jobs, we see the opposite trend in savings rates.”
Their research found that the typical job changer saw their 401(k) contributions decrease by almost 1 percentage point.
Over time, it can add up and rob workers of thousands of dollars in retirement benefits. Consider a worker who started his career with an annual salary of $60,000 and has since changed jobs eight times. This is the typical number of job changes for Americans.
By reducing your contributions each time you move to a new job, you could save a total of $470,000 in your 401(k) by the time you turn 65. For most of her career, she will have $770,000 by the time she reaches retirement age.
“In the most concrete terms, you’ll spend six years less in retirement,” Greig said. “Retirement assets have decreased significantly.”
Incomplete 401(k)
Indeed, 401(k)s have come under a lot of criticism over the past few decades, including from prominent retirement expert and newsy economist Teresa Ghilarducci, who announced earlier this year that 401(k)s He told Watch that the retirement plan was too “slim” and problematic. -Designed to fit the way people actually work.
For example, a 401(k) can perform well for people who can work steadily throughout their careers and build a healthy nest egg without having to take time off due to layoffs or taking care of children or family members. . But many Americans have experienced job setbacks or career interruptions, and some may find themselves in a 401(k) due to a financial emergency.
But Greig said 401(k)s are always a work in progress, and lawmakers, plan sponsors and employers are evolving the structure of the vehicle to help more workers save consistently throughout their careers. Point out that you are doing it. For example, when 401(k)s started in the late 1970s, the plans were typically voluntary and workers had to opt in to start saving.
Most plans now offer automatic enrollment, and a Vanguard report found that more than 6 in 10 employees have switched to a company that automatically enrolls them in a 401(k) plan. . And in 2025, the Secure 2.0 law will require all new retirement plans to automatically enroll employees.
But new research from Vanguard suggests that the most common default participation rate of 3% may be too low, given that so many workers’ savings rates decline when they change jobs. There is. One solution is to raise the default savings rate to a higher level, such as 6%, Greig said.
At the same time, he added, workers need to be aware of this pitfall when changing jobs.
“The moment you get a new job, think about keeping what you did before so you can get the most out of your calculations, and sign up for annual increases so that as your income increases over time, your savings rate also increases. ” she pointed out.
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