As the job market changes, many people switch jobs to find better opportunities and earn more money. But, changing jobs often can affect how much you save for retirement.
A recent study by Vanguard found that with each job change, your retirement savings contributions can drop by 0.7%. Over time, this can lead to losing a lot of money for your future. For instance, if you start with a salary of $60,000 and switch jobs several times, you might miss out on about $300,000 in retirement savings—an amount that could support several extra years in retirement.
Key Takeaways
SECURE Act 2.0 helps job hoppers save for retirement by delaying Required Minimum Distributions, increasing Roth options, and introducing automatic enrollment.
- Automatic enrollment in 401(k) plans will start at a rate of 3% to 10% of pre-tax income, with annual increases until reaching at least 10%, unless employees choose otherwise.
- Employers can match student loan payments by putting the same amount into retirement accounts, allowing workers to build up savings while paying off loans.
- The SECURE Act 2.0 also introduces a searchable database for forgotten 401(k) accounts and allows older workers to make extra catch-up contributions that will adjust for inflation.
Automatic enrollment risks for savers
More employers are automatically enrolling workers in 401(k) plans to boost savings. But these plans usually start you off at a low contribution rate of just 3% or 4%. This rate can be too low, especially if you’re mid-career or further along.
While new hires might begin with this rate and plan to raise it later, experienced employees changing jobs might end up with serious gaps in their retirement savings. If not addressed, these low rates could leave you facing a significant shortfall when you retire.
Some companies don’t offer automatic enrollment in 401(k) plans. This means you might miss out on making contributions if you forget to sign up when you change jobs. Even a few months without contributions can add up over time and affect your retirement savings.
Retirement savings vehicles beyond 401(k)
Besides 401(k) plans, workers without employer-sponsored retirement plans, like freelancers and small business owners, can use other ways to save for retirement. One option is an Individual Retirement Account. IRAs let you take charge of your investments and adjust how much you want to save, although you can put in less money each year than with employer plans.
If you work for yourself, the Simplified Employee Pension Individual Retirement Account is a great way to save for retirement. It’s built for small business owners and freelancers, letting you contribute more and enjoy tax breaks. This is especially useful if you don’t have an employer retirement plan.
The catch? You must keep up with regular contributions, which can be tough when your income isn’t steady. The good news is that the recent SECURE Act 2.0 now lets you make Roth contributions to SEP IRAs and SIMPLE IRAs, giving you more ways to plan your taxes.
Traditional pension plans, which used to offer a guaranteed income after retirement, have become less common, especially in private companies. Now, there are more plans like 401(k)s, where you need to save on your own.
Since pensions aren’t as available, it’s important for you to make the most of any retirement savings options you have and make sure your retirement savings plan is strong and well-planned.
Maximizing retirement savings with SECURE Act 2.0
In 2022, Congress passed the SECURE Act 2.0, which updates the original SECURE Act from 2019. This new law includes changes that aim to make it easier for people to save for retirement, with fewer penalties and more financial benefits. These changes help everyone from young workers to those nearing retirement save more effectively.
One big change with the act is the adjustment to Required Minimum Distributions for traditional IRAs and 401(k) accounts. Before, you had to start withdrawing from these accounts at age 72, but now the age is 73 starting in 2023, and it will increase to 75 in 2033. This delay allows your investments to grow tax-free for a longer time, which is great if you want to keep the money invested, possibly for your heirs.
For those thinking about leaving retirement accounts to loved ones, the delay in RMDs offers a chance for greater long-term growth, especially when considering Roth conversion strategies that avoid future RMDs.
Further, the act reduced penalties for not taking required minimum distributions (RMDs) from 50% to 25%. If you fix the mistake quickly, the penalty is just 10%. Another important change is that starting in 2024, there are no RMDs for employer-sponsored Roth accounts.
This makes Roth accounts even more appealing for people who want tax-free growth and don’t want to take out money during retirement. It aligns employer Roth accounts, like Roth 401(k)s, with Roth IRAs, letting you keep your Roth funds invested as long as you want.
From 2025, companies that started 401(k) plans after December 2022 must auto-enroll eligible employees. Contributions will range from 3% to 10% of pre-tax income. Plans must also increase contributions by 1% each year until reaching at least 10%, with a 15% cap, unless employees choose otherwise. This automatic enrollment aims to help workers save more for retirement.
Companies with fewer than 10 employees or less than three years in business are not required to follow this rule, acknowledging the challenges smaller businesses face.
For workers trying to save for retirement while handling other financial responsibilities like student loans, the SECURE Act 2.0 offers more flexibility. Employers can match your student loan payments by putting the same amount into your 401(k), 403(b), or SIMPLE IRA. This means you can get the benefits of employer matching without directly contributing to your retirement account.
This can be a big help for new graduates with a lot of student debt, allowing them to build up retirement savings while paying off loans. Since this option is up to employers, you should talk to your HR department if you’re interested.
It’s also much easier to take money out of retirement accounts without a penalty for a few reasons. You can withdraw up to $1,000 without penalty for emergencies if you pay it back in three years.
People facing situations like terminal illness, federally declared disasters, or survivors of domestic violence can also take money out without penalties. Survivors of domestic violence can take up to $10,000 or 50% of their account balance, whichever is less.
The Department of Labor will also create a searchable database for forgotten 401(k) accounts. Right now, around $1.3 trillion in retirement funds are unclaimed, often left behind when people switch jobs.
Also, older workers can make extra catch-up contributions that will adjust for inflation. Beginning in 2025, individuals aged 60 to 63 can contribute an additional $10,000. However, high-income earners must put these extra contributions into Roth accounts starting in 2026.
To sum up
As people switch jobs more often, they face new challenges in building up their retirement savings. Sometimes, automatic sign-ups and low starting contribution rates can accidentally reduce savings for those in the middle of their careers.
Plus, the complicated rules about IRAs and employer plans mean you need to stay alert and take an active role in managing your retirement savings across different jobs to make sure you have enough money in your later years.
The SECURE Act 2.0 provides new ways to boost your retirement savings. It includes delayed RMDs, more Roth options, automatic sign-ups, and financial benefits. By taking advantage of these changes, you can handle the complexities of modern retirement planning better, aligning your retirement goals with the flexibility needed in today’s changing job market.
