How to Use a Job Change to Hit Your Financial Reset Button
When you are switching jobs, you may be looking for more money, a step up the career ladder, a flexible lifestyle, or any job you can find to cover your bills. Even if you are not switching jobs, the upcoming open enrollment for health insurance offers another opportunity to take financial stock. Take the time to hit the reset button on your short-term and long-term financial health by considering smart financial moves for your retirement savings, employment benefits, and overall budget.
“Everyone, regardless of why they’re switching jobs, should treat this change like a New Year’s resolution,” said Valerie Radford, head of retirement retail solutions at Prudential Retirement. “This is the time to wipe the slate clean, reassess your budget. If you have a net decrease in salary, maybe now is the time to make a budget. If you have a net increase, maybe it’s time to start saving for retirement. Either way, you can use this time as an opportunity for improvement.”
Don’t treat your retirement savings like lottery winnings
If you have retirement savings at your former or soon-to-be former employer, you may be tempted to cash out and treat yourself to a short vacation or a few nights on the town. Maybe you need to pay down debt. More than 30 percent of workers cash out their 401k when they switch jobs, according to Retirement Clearinghouse.
“I get it—sometimes you have to do what you have to do,” Radford said. “There’s sometimes an emotional feeling that this is found money, especially if you haven’t been contributing and the money is only your employer’s contribution.”
But instead of viewing the potential gain from that money now, a better attitude is to consider your future self and the benefits of that money decades from now. If you absolutely need money now, consider a seasonal job or investigate whether you can borrow from the retirement plan at your new employer.
“Retirement savings are really meant for the long term,” Radford said. “The longer your money is in the account, the more interest or gains you will likely earn. You get the power of compound growth. If you do cash out, you lose out on the compound growth. You will also be hit with penalties and taxes. It’s a very costly way of accessing money, both now and in the future. This money that might pay your rent for a month now will do you more good when you’re in your 60s or 70s if it has grown to tens of thousands of dollars.”
Your former employer may allow you to leave your retirement savings in that account. You already understand the app and website, and you don’t have to take any action now. A big disadvantage, however, is that likely, you can no longer contribute to the account.
“If you’re a frequent job switcher, you may end up with a number of ‘orphan 401k, 403b, and 457 plans that are harder to manage and harder to determine you’re investing wisely,” Radford said.
With that in mind, it’s time to consider more portable options—including rolling over your employer-sponsored 401k, 403b, or 457 plan into one IRA, she said. You can start online or talk to a Prudential financial advisor in person or by phone. Factors to compare and consider include the variety and quality of investment options and the amount of fees.
Finances matter but benefits are key too
No surprise, the desire to improve finances played a major role in job switching. A Prudential survey of nearly 1,000 full-time workers who switched jobs over the last two years, pre-pandemic, found that 75 percent changed jobs for financial reasons and 25 percent changed jobs for a better lifestyle.
Those who changed jobs for financial reasons were more likely to report broad success, according to the survey. Eighty-six percent of financial switchers said they’d change again; 81 percent reported they were better off financially; 68 percent said they had moved up the career ladder, 64 percent said they were spending more time with family; and 59 percent reported lower stress levels. Of those motivated by lifestyle, 76 percent said they’d switch again; 49 percent reported they were financially better off; 38 percent moved up the career ladder; 56 percent reported spending more time with family, and 64 percent said stress levels were lower.
One in four job switchers reported they wished they had done more research prior to switching, Radford said. The most common “if I had it to do over again,” themes reported by job changers were negotiating for a higher salary, asking for better benefits, prioritizing family time, and considering the financial and emotional cost of commuting, she said.
Amid the COVID-19 pandemic, employees believe benefits are more important than ever, according to a Prudential survey released in September. Seventy-five percent responded that benefits were a much more important component of a job in the current environment. Such benefits, which can help mitigate unanticipated expenses, include health savings accounts, accident insurance, and life insurance.
Other considerations include:
- How much money will the new employer contribute to your retirement plan?
- How much does the company contribute to health insurance, and what does the insurance cover?
- How much paid time off will you get, and how soon can you begin taking PTO?
- Does the company offer other benefits such as onsite childcare, a gym membership, or financial management programs?
“Even seemingly non-financial considerations can have a financial impact,” Radford said. “Compensation is obviously a key factor that people focus on. But individuals should be thinking more broadly about their overall benefits package.”