Do You Job Hop for Higher Pay? Vanguard Says It Could Cost You $300K in Retirement Savings

People who change jobs often might make more money than average in the long run. However, many of them experience opportunity costs that grow over time and a slowdown in retirement savings rates. A September 2024 Vanguard study of over 54,000 workers who changed jobs between 2015 and 2022 revealed that while the median job switcher received a 10% pay hike, their savings rate simultaneously dropped by 0.7% as the majority ended up with a reduced allocation to their employer-sponsored 401(k) accounts. Data showed that the average savings rate was poorer for those with smaller pay hikes or who began working for a new employer offering voluntary enrollment options for retirement plans.

Participants Who Were Automatically Enrolled Aren't Safe Either

Job changers with employers offering automatic enrollment options for 401(k) plans also didn't fare well since the most common default savings rate was only 3%. 401(k) contributions are collected monthly at a default rate and invested into default funds unless the account owner changes them. The study found that 60% of new plan participants used the low default savings rate for contributions. However, workers enrolled automatically by their new employers experienced a 0.3% reduction in savings rates compared to the 1% decline for participants with voluntary enrollment options. Considering a career with nine job changes and resetting the savings rate to a default of 3% each time, participants can lose $300,000 in retirement savings by 65 if they join the workforce with a $60,000 annual income at 25. However, if the default savings rate is increased to 6%, the loss would be significantly reduced to $40,000.

Employers Are Well-Positioned To Address The Savings Issue

The $300,000 setback could be almost six years of reduced spending in your golden years compared to staying with the same employer that automatically increased your savings rate for retirement plans. The study showed that tenured job switchers who held a previous position for longer benefitted from automatic savings rate hikes. However, they experienced the sharpest decline in their rate after switching since the default savings rate fell back to reduced levels.

Hence, Vanguard Research opined that workers focused on securing higher pay through job changes rather than bumping their retirement contributions can be helped if employers across industries make adjustments on their own by hiking the default savings rate. Furthermore, employers can also establish custom savings rates depending on the worker's age or years to full retirement age. A shared employee database or requesting new workers about their existing plans from previous employers can also help current employers ensure the same rate rolls over. While these changes to retain a high savings rate for workers require time and policy adjustments, participants can take control by becoming active savers and making changes to the savings rate independently.

While 401(k) contributions offer several tax perks, like lowering your annual tax liability and growing your pre-tax money tax-free, employer-matching options could be the biggest advantage. When you make 401(k) contributions, your employer can offer to match them, sometimes close to 7% of your annual pay. It is essentially free, pre-tax money that further complements the power of compounding.