On average, the typical worker holds roughly 12 different jobs over the course of their career, according to the Bureau of Labor Statistics. Among millennials, job-hopping has become par for the course, with 60 percent of young adults saying they’d be open to a new career opportunity.
Changing jobs in your 20s or 30s may not be that big of a deal but it’s a different story when you’re at a later stage in life. Switching to a new role when you’re heading into the home stretch before you retire can be tricky. Keeping your financial goals in sight and having a plan for starting a new gig can make the transition easier and less taxing on your bottom line.
Decide what you’ll do with your old retirement plan
If you’ve been saving steadily in a 401(k) plan or another employer-sponsored option, the first thing you need to consider is what’s going to happen to that money if you’re moving on to a different company. You’ve got three basic options to choose from: cash it out, roll it over into a new qualified plan or leave it where it is.
Cashing out a 401(k) might cross your mind if you don’t have a lot saved in your plan or you need some money to bolster your savings while you’re getting started in your new job. Pocketing that money, however, can come at a steep price. Generally, if you cash out a 401(k) before age 59 ½, you’ll have to pay a 10 percent early withdrawal penalty on the money.
There’s an exception if you take an early withdrawal but you’re at least 55. In that case, you could avoid the 10 percent penalty. Regardless of whether you get stuck paying the penalty or not, you’d still have to pay ordinary income tax on the distribution. If you’re in a higher tax bracket, pulling money out your 401(k) ahead of schedule could get expensive.
Rolling your account over into an individual retirement account (IRA) or into your new employer’s retirement plan could save you some money and your savings could continue to grow. If you’re considering either option, take a look at the investment choices an IRA or your new employer’s plan offers. Also, factor in the fees to see how much you stand to pay for a particular investment.
If the fees are too high or the investment choices aren’t that impressive, you could just leave your plan where it is. Once you reach 59 ½, you could take the money out penalty-free. Again, you’d just have to pay regular income tax on withdrawals, unless you saved in a Roth 401(k). In that case, qualified withdrawals would be 100 percent tax-free.
Enroll in your new employer’s plan if they offer one
If you’re changing jobs in your 50s or 60s, you may not see much point in signing up for your new employer’s retirement plan. After all, if you’ve only got a few years left until you retire, you may not get much use out of it, right?
Actually, the exact opposite is true. If you’re 50 or older, you should be even more focused on maxing out your employer’s plan than ever. Once you reach the big 5-0, you can step up your savings through the power of catch-up contributions. This is an additional amount you can chip into your employer’s plan just for hitting the age threshold.
For 2017, 401(k) savers can add an extra $5,500 to their plan, on top of the regular $18,000 annual contribution. If you haven’t always been consistent about taking full advantage of your employer’s plan, that’s a huge plus when it comes to making up for lost time.
Catch-up contributions also apply to IRAs. If you’re saving in a traditional or Roth IRA, you can save an extra $1,000 for 2017, in addition to the annual $5,500 contribution limit. The more money you can pour into these plans in your 50s and 60s, the better, especially if you’re planning to keep working longer and delay taking Social Security.
Speaking of Social Security…
Once you turn 62, you can begin drawing Social Security benefits, even if you’re still working. The catch is that doing so could temporarily reduce your benefit amount. If you’re below full retirement age (which is 66 or 67 for most people), the Social Security Administration deducts $1 from your payments for every $2 you earn above the annual limit. In 2017, the earnings limit is $16,290.
If you hit your full retirement age and you’re still working while also receiving benefits, the deduction changes to $1 for every $3 you earn above a preset limit. For 2017, the limit on earning is $44,880 and only earnings before the month you reach full retirement age are counted. In the month you reach full retirement age, your earnings won’t reduce your benefits, no matter how much money you’re making.
That’s something to keep in mind if you’re changing jobs in your 60s and you’re expecting a lower salary. If you need to take Social Security early to supplement your income, you need to be aware of how those limits could affect your benefits check.
If you think work may be on the horizon for the long-term and your new job is paying the bills, you should also think about the benefits of putting off Social Security. For each year you delay benefits past your full retirement age, your benefit amount increases. If you can hold out until age 70 to start drawing benefits, you’ll get an 8 percent raise in your monthly payment.
Don’t forget about health insurance
Health care can be one of the biggest threats to your retirement security. If you’re planning to switch jobs in your 40s, 50s or 60s, you need to be planning for how changes in your health insurance coverage could affect your ability to save. If you’re paying more in premiums at your new job, for example, that may mean you’re able to funnel less cash into your employer’s retirement plan.
You can opt to enroll in Medicare once you turn 65, even if you’re still working but there’s one potential hitch to consider. If you’ve been saving in a tax-advantaged Health Savings Account through your employer’s plan, you wouldn’t be able to keep making those contributions if you’re covered by Medicare. In the end, you have to think about how the advantages of taking Medicare stack up against the benefits of keeping your employer’s plan.