Decades ago, employees found a job post-college and clung to it, riding the tide for a significant chunk of their professional lives. Fast forward to today, and loyalty lies in leveraging opportunities rather than just a long-standing allegiance to a single employer.
In this modern era, those hopping between jobs aren’t deemed unreliable but instead seen as ambitious individuals unafraid to chase after new horizons.
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While transitioning to a better job can bolster your financial prospects, liquidating your retirement savings upon each job switch could paint a vastly different financial picture. Thus, navigating the waters of your 401(k) upon changing jobs demands a methodical approach.
Proceed with Caution – Don’t Drain Your 401(k)
In a recent communication with investors, Larry Fink, the CEO of BlackRock, revealed a staggering statistic: “Studies show that about 40% of employees cash out their 401(k)s when they switch jobs, putting themselves back at the starting line for retirement savings.”
The implications of this number are profound. Why? Because withdrawing from a 401(k) can have severe repercussions.
If you opt to cash out your 401(k) prior to reaching 59 1/2, brace yourself for a 10% early withdrawal penalty. Moreover, as Fink pointed out, you essentially reset your retirement saving journey, depriving your future self of that nest egg.
Remember, withdrawing from a 401(k) doesn’t only mean taking out a specific amount of money. It also equates to forfeiting potential growth on those funds.
For instance, supposing you cash out a $5,000 401(k) at 30 during a job switch. While seemingly inconsequential, retaining that $5,000 in a retirement account could burgeon into roughly $74,000 by age 65 with an 8% average annual return — slightly below the market norm. Sacrificing that sum is no trifling matter.
Strategic Moves for Handling an Old 401(k) Post Job Transition
Upon changing jobs, you might retain your old 401(k) where it lies. Nonetheless, a more prudent approach typically involves either transferring your old 401(k) into your new employer’s plan (if feasible) or rolling it into an IRA. Opting for a direct rollover is generally the preferred route, ensuring your 401(k) funds smoothly transition into your fresh retirement plan.
Bear in mind, contemplating a 401(k) cash-out as you switch jobs warrants a second thought. No matter how modest the sum seems, it could manifest as substantial retirement savings shortfall when your golden years arrive. Plus, avoiding penalties for accessing your hard-earned savings holds its own merit.
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