According to data collected by the U.S. Bureau of Labor Statistics, middle aged Americans are, on average, likely to have held 11 or 12 jobs by the age of 48. See http://www.bls.gov/nls/nlsfaqs.htm#anch4. The same group will have, on average, experienced 5 or 6 periods of unemployment by the age of 48. See http://www.bls.gov/nls/nlsfaqs.htm#anch42. Only about 10 percent of these workers will have had between 0 and 4 jobs by age 48. In other words, the long lasting, stable employment that we anticipate for adulthood is mostly a mirage. Few of us enjoy that kind of certainty. Indeed, it's fair to say just about all of us are temporary workers.
Of course, there are differences among workers. Some are considered full time, others part time. Some are permanent--either full time or part time--and others are temporary--either full time or part time. But the average American, with about 12 jobs by the age of 50, is realistically a temporary employee, just with better benefits if he or she is considered "permanent" and is working full time.
The impermanence of employment means fewer employees qualify for defined benefit pensions, even in the few jobs that still offer pensions. It also means that in the real world, workers have trouble building up their 401(k) and IRA accounts, because they're periodically hit with a spell of unemployment or have to rebuild benefits at a new employer. Many workers draw down their retirement accounts during episodes of joblessness. When they resume working, they have less time to build up their balances again. The only ways to counteract the temporariness of employment is to save furiously, or, if you're lucky enough to have a job offering a pension, to somehow stay put long enough to qualify for the pension, no matter how boring the job or overbearing the boss.
The wobbly, and sometimes turbulent, work lives of most people place this year's politics in sharp focus. The debates over Social Security, health insurance, trade policy, jobs programs and wage stagnation become all the more crucial when we consider that, in the end, we're almost all temporary workers. Proprosals that enhance stability for workers, like protecting and strengthening Social Security and Medicare will be popular. Measures like free trade agreements are likely to be losers.
But don't count on the government to bail you out. You're not a major financial institution, so assume that there will be no bailout for you. Save as much as you can--and then save some more.
Showing posts with label job change. Show all posts
Showing posts with label job change. Show all posts
Monday, May 30, 2016
Thursday, June 7, 2007
Don't Unretire Your Retirement Savings
Legend has it that there was once a time when gasoline cost 35 cents a gallon, mortgage payments were $200 a month, and people pursued a career by getting an education or training in a field, finding a job with a good employer, and staying there for 30 or 40 years until they retired with a pension and a watch. Some of the legend is true--gasoline once did cost 35 cents a gallon and mortgage payments for many people were $200 a month, or even less (but they had to watch flickering black and white TVs). Spending one's entire working life at one employer was, in those days, probably more the exception than the rule. But the availability of defined benefit pensions (which promised a predictable amount of money in retirement) made doing so worthwhile.
Today, most people work for a half-dozen or more employers during their working lives, and the defined benefit pension is about as common as the brontosaurus. They usually don't work long enough at any one employer to qualify for a pension, and if they do, it generally isn't much of a pension. (Some companies have changed traditional defined benefit pensions to "cash balance" plans that supposedly favor newer employees but hurt the interests of long time employees; so don't think loyal and faithful service mean much.)
Today's way of funding retirement is the retirement savings account, such as 401(k) plans, IRAs, etc. Originally, these accounts were meant to supplement traditional pensions. But now, with defined benefit pensions going the way of the carrier pigeon, retirement savings accounts--especially the 401(k)--have morphed into the only show in town for a lot of workers. They have tax advantages. But you can wreck your retirement plan every time you change jobs.
That's because every job change gives you an opportunity to withdraw the money in your 401(k) account. If you do, you'll have to pay federal and state income taxes on the amount withdrawn and also a penalty of 10% if you're younger than 59 and 1/2. Depending on where you live, you could lose half or more of the funds withdrawn. Even if you put the remainder in a taxable savings or investment account, its earnings will be taxed currently. So you lose the boost to your savings from compounding earnings on a tax deferred basis. Of course, if you spend the money, it's gone forever.
When you change jobs, don't withdraw the money in your 401(k) account. You'll have one or more of these options: (a) leave it in your old employer's 401(k); (b) roll it over into an IRA; or (c) roll it over into a 401(k) plan offered by your new employer). Compare the fees and expenses of these options, and the investment alternatives. Then pick the option that gives you the best combination of low fees and expenses, and good investment alternatives. If you have a small 401(k) balance with your old employer, it may not allow you to stay in its plan and may issue you a check for the balance. Be sure to contribute that money into an IRA or your new employer's 401(k) plan within 60 days. If you meet the 60 day deadline, you won't have to pay taxes or a penalty.
Let's say you change jobs 8 times during your adult working years. If you withdraw your 401(k) money each time, you'll have only Social Security and whatever savings you've accumulated in taxable accounts. If you keep the money in one retirement account or another, you'll have compounded your way to what will probably be a nice supplement to your retirement. (We discuss the power of compounding at http://blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part.html.) Resist the temptation to spend retirement savings just because you can. All of your retirement days will be long if you're trying to make a go of it on just Social Security.
Tech News: A new use for ring tones: attracting leopards. Just don't leave your cell phone on in the jungle. http://www.wtop.com/?nid=456&sid=1159321.
Today, most people work for a half-dozen or more employers during their working lives, and the defined benefit pension is about as common as the brontosaurus. They usually don't work long enough at any one employer to qualify for a pension, and if they do, it generally isn't much of a pension. (Some companies have changed traditional defined benefit pensions to "cash balance" plans that supposedly favor newer employees but hurt the interests of long time employees; so don't think loyal and faithful service mean much.)
Today's way of funding retirement is the retirement savings account, such as 401(k) plans, IRAs, etc. Originally, these accounts were meant to supplement traditional pensions. But now, with defined benefit pensions going the way of the carrier pigeon, retirement savings accounts--especially the 401(k)--have morphed into the only show in town for a lot of workers. They have tax advantages. But you can wreck your retirement plan every time you change jobs.
That's because every job change gives you an opportunity to withdraw the money in your 401(k) account. If you do, you'll have to pay federal and state income taxes on the amount withdrawn and also a penalty of 10% if you're younger than 59 and 1/2. Depending on where you live, you could lose half or more of the funds withdrawn. Even if you put the remainder in a taxable savings or investment account, its earnings will be taxed currently. So you lose the boost to your savings from compounding earnings on a tax deferred basis. Of course, if you spend the money, it's gone forever.
When you change jobs, don't withdraw the money in your 401(k) account. You'll have one or more of these options: (a) leave it in your old employer's 401(k); (b) roll it over into an IRA; or (c) roll it over into a 401(k) plan offered by your new employer). Compare the fees and expenses of these options, and the investment alternatives. Then pick the option that gives you the best combination of low fees and expenses, and good investment alternatives. If you have a small 401(k) balance with your old employer, it may not allow you to stay in its plan and may issue you a check for the balance. Be sure to contribute that money into an IRA or your new employer's 401(k) plan within 60 days. If you meet the 60 day deadline, you won't have to pay taxes or a penalty.
Let's say you change jobs 8 times during your adult working years. If you withdraw your 401(k) money each time, you'll have only Social Security and whatever savings you've accumulated in taxable accounts. If you keep the money in one retirement account or another, you'll have compounded your way to what will probably be a nice supplement to your retirement. (We discuss the power of compounding at http://blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part.html.) Resist the temptation to spend retirement savings just because you can. All of your retirement days will be long if you're trying to make a go of it on just Social Security.
Tech News: A new use for ring tones: attracting leopards. Just don't leave your cell phone on in the jungle. http://www.wtop.com/?nid=456&sid=1159321.
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