The Set Up
A few weeks back, I read a headline in the Wall Street Journal that genuinely shocked me.
It was an article in the Wall Street Journal titled, “Exclusive| Changing Jobs Can Put a $300,000 Dent in Retirement Savings.”
I immediately clicked the article and read on, as switching jobs is typically a good thing financially for most people, and this implied something otherwise.
What I found inside was fascinating, and it came from the great people at Vanguard, who found a $300,000 mistake in people’s financial lives.
The Research
Let me start with this quote from directly from the paper:
The typical U.S. worker has nine employers over the course of their career. The median job switcher sees a 10% increase in pay but a 0.7 percentage point decline in their retirement saving rate when they switch employers.
In plain English, people switch jobs a lot, and when they do, they save less.
Here are the results of this, according to their research:
The impact that a retirement savings slowdown can have on workers who switch jobs across employers is significant. For a worker earning $60,000 at the start of their career who switches jobs eight times across employers (for a total of nine jobs), the estimated loss in potential retirement savings could be about $300,000— enough to fund an estimated six additional years of spending in retirement.
In other words, this costs people a lot of money, and they either have to work longer or spend less in retirement.
Here’s Vanguard’s solution: fix the 401k plan and have a higher default savings rate as people switch jobs and enter new plans.
That’s a great idea, one I wholeheartedly agree with.
However, since you and I cannot change how 401ks are systematically run, I want to share why this happens and what you can do about it.
Something Good Leads to Something Bad.
This research from Vanguard flies in the face of another well-known tactic for growing wealth, that is, if you switch jobs frequently, your income will grow faster than if you stay with your current employer.
The authors allude to this by saying that each time someone moves, they bag a 10% increase in pay, which isn’t too shabby.
And herein lies the problem.
It shows that while people are good at growing their income by changing jobs, they still drop the ball and save less.
Something good leads to something bad.
This brings me back to a quote I live by that my dad taught me as I learned the wealth management business.
He said, “Tom, people are hardwired to do the wrong thing.”
As a young man learning the art form of the wealth management business, I didn’t quite understand what he was talking about, but over the past almost 11 years, I get it.
- People follow the herd.
- They sell at the wrong time.
- They start the side hustle du jour at precisely the wrong time.
- They buy at the top.
And in this case, they make a career move and save less.
These are well-intended actions done at the wrong time.
And these actions costs well-intended people a lot of money.
The obvious answer is to move jobs and adjust your 401k allocations higher.
But here’s the problem.
People don’t do that.
This is another example of how ordinary people lose out if they continue to navigate the financial system without a complete-ish understanding of how it works and how to efficiently grow money.
Research like this motivates me to write to you because it highlights the difficulty of amassing wealth.
Peer Pressure
Everyone, I mean everyone, says, “You gotta move to make more.”
It’s common knowledge to do this; in many cases, it’s not bad.
But the fruit of all the job switching is less investing, and according to Vanguard, assuming someone starts their career at 60,000 and loses .7% in their savings rate, the tally is $300,000.
$300,000.
That’s real money for 99.99% of us.
This sort of thing is why I have a job and why bowing down to financial peer pressure is a bad idea.
Get financial advice from people who know what they are doing, not your neighbor who “invests his own stocks.”
I can’t tell you how many conversations we have had at Fjell where we’re sitting down with a successful family and we say, “Hold on a second. Let’s think through that a bit more. Something seems a bit off.”
Families usually come to us with an acute problem that needs immediate fixing (e.g., reinvesting a lump sum of cash or completing a retirement plan). We fix that, and from then on, we push off the dock and start navigating the markets, life, and time together.
Let me be crystal clear here: every large financial decision you make, you want to crush everything about it.
Every time.
Otherwise, stuff like this Vanguard research will eat away at your ability to build your net worth.
Building wealth is hard.
It’s easy on paper but hard in real life.
We’re all being pushed around by the media, our community, and a world saturated with media.
It’s hard to know what you should be doing, when you should be doing it, and whether you are making huge financial mistakes.
This research from Vanguard shows that people are decent at growing their wages when they switch jobs but miss out long-term by not adjusting their contributions.
I wouldn’t blame someone for missing this stuff, but unfortunately, the damage that can happen when you do something good on paper (getting a new job with a higher income) can lead to long-term side effects (underfunded retirement plans).
These problems are why Fjell exists and why our advisors are rock stars.
They give clients context and help make good things, like a new job, even better by helping align the higher income, the proceeds from the retirement plan at the old job, the new benefits package, and the new cash flow going into the new retirement plan.
The Take Away
Suppose you take anything away from this week’s edition and Vanguard’s research:
- If you switch jobs, remember this edition.
- If you are doing something large financially, take your time and think through everything that needs to happen for it to be successful.
- If possible, work with a financial advisor who can help you navigate this stuff.
At the most practical level, log into your 401k and poke around.
- Are you getting the match?
- What % are you saving?
- What’s your performance?
- Roth vs. traditional allocation.
The system isn’t easy to navigate, so if you need or want help, book a call with us today.
