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Congrats on moving and looking for something new during the so-called “big resignation.”
But with new freedoms may come new concerns, depending on how long you plan to not work: How will not working affect your retirement fund? When you resign, things like unmatched contributions, one-time distributions, and tax consequences may be swirling around in your mind because you’re not actively contributing to the company’s programs.
Taking some extra steps to protect your money can protect your retirement savings when you find a job that suits you better or leave the world of work altogether.
What happened to the job market?
Americans are leaving their jobs in droves. The COVID-19 pandemic has disrupted our lives, forcing us to look inward and figure out what we really want in terms of our careers. Millions of Americans quit their jobs in 2021, and many more are considering better jobs in 2022.
One 2021 survey from Bankrate Said people were considering flexible work arrangements, higher wages and job security in their careers. More than half of employees surveyed said they would be willing to leave their jobs to find something better.
Some people nearing retirement age opt to retire early. Are you one of those people who are ready to leave your job?
According to Goldman Sachs research, nearly 70 percent of the 5 million people who stopped working during the pandemic were over the age of 55. About 1 million of them are at typical retirement age, and 1.5 million are considered early retirees.
James Gallagher, president of Waterstone Financial, said: “I like to use the phrase that if you quit your job and don’t go back, and you’re 60 years old, you’re going to face 30 years of Unemployed.” in Fort Myers, Florida. “Saving a little at a time can become a very big thing. If you wait, you’ll never be able to retire.”
But not everyone has left the labor force entirely.
“I’ve seen a lot of people quit companies and become part of the gig economy, contracting people out or starting their own businesses,” Gallagher said. “I instruct them that they need to continue to implement a retirement savings plan.”
Can you afford a job change or retirement?
While it might feel good to tell your boss to go hiking, if you can’t put the job behind you, you may not be as happy later on.
“The biggest mistake people make is making decisions out of fear,” said Kirk Francis, CFO and CEO of Financial Life Advisors in San Antonio, Texas. “I also think it’s a mistake to make decisions that are completely emotional rather than based on facts and figures.”
Before you give notice, please consider:
- Where your cash flow will come from.
- How will you get health insurance?
- Do you have an emergency fund to deal with unexpected expenses?
There are also longer-term considerations, such as retirement.
The recent high returns in the stock market and skyrocketing house prices have made many people realize they have more money than they thought, but there are dangers in this way of thinking.
“I tell people to make sure they have three to five years of conservative money to live with and that it doesn’t have too much volatility,” Gallagher said. “That way, if the market goes down, you can use short-term liquidity and wait for the market to recover. .”
Due to increased life expectancy, rising health care costs and inflation, there may not be as much money in retirement accounts as you might think.Before you say “I quit”, you need to have a good grasp How much money do you need when you retire.
Leaving work or taking breaks too early can also affect your future benefits from programs like Social Security.
Francis explained that lifetime benefits are based on income history and when you start paying. Usually the highest-earning years are the last years someone works.
Therefore, taking time off work or significantly reducing your income may reduce your overall benefits later in life.
You can start claiming Social Security benefits at age 62, but both Francis and Gallagher say it’s probably not a good idea. The longer you delay your registration, the more your monthly payments will be until age 70.glad you know what full retirement age Refers to social security.
“If you don’t have another source of income and need it, get it early,” Francis said, adding that a financial planner can help you determine if you really need to enroll in Social Security, or if you can use other sources of income to pay for a few years. bill.
Another thing to avoid is getting your 401(k) loan from your 401(k) loan to help you get through tough times or find a job.
“I don’t recommend using a 401(k). If you take money out of a retirement savings plan, you have to pay penalties and taxes for that. So when you take money out of these things, to get real money, it may Much more expensive than you might think,” Gallagher said.
In addition to the income tax impact and any early withdrawal penalties for retirement accounts, taking out a loan can set your retirement savings back years because you’ll miss out on compounding benefits. A loan may mean you have to work longer than planned to get the money back.
Before you leave your job, check to make sure that any loans you may have from your 401(k) are not due immediately. Some companies require loan repayments when jobs are terminated.
What happens to your retirement account when you leave your job?
Leaving a job also means leaving the organization’s retirement plan.
When you leave your job, make sure you don’t leave money with your former employer.
“If you’re jumping from job to job, be sure to bring your 401(k). People keep forgetting about them, they get these bills for $10,000 or $11,000, and they don’t remember it was done what works,” Gallagher said.
If you can’t join the new plan right away because your new employer has a waiting period, Francis says it’s a good idea to keep the money in your former employer’s plan until you can transfer the full amount directly from the plan to plan. roll over.
You can do several things with your retirement account, and you have several options.
You can:
- Leave it where it is, but you can no longer contribute to it or get an employer match.
- If you are self-employed, transfer it to your new employer plan or individual 401(k) plan.
- Convert it to an Individual Retirement Account (IRA).
- Convert it to a Roth IRA.
- cash.
For more information on each option, check out, leave your job?Here are 5 options for your 401(k).
If you have a 401(k), Francis recommends making sure you know the vesting timeline before submitting your resignation. The funds you deposit into the account are yours, but companies usually have a timeline until the funds they contribute are fully owned by you.
You will be left with any funds that are not fully vested in your 401(k). If you’re only a short time away from a milestone, you might want to consider staying put until you reach it.
Don’t Stop Contributing to Your Retirement Savings When You Leave
Only thinking now will hurt you later. Planning for enough money to pay your monthly bills may haunt you in the future.
“The danger is that you’ll never be able to retire. You can’t make up your income in the last few years before retirement, so if you don’t think ahead, you’re going to be on a huge financial cliff,” Gallagher said.
Your new employer may not allow you to contribute immediately to your new retirement plan.
During that time, Gallagher recommends putting some money into a separate account for retirement so you can still save.
Now is a good time to take risks, Gallagher said.
“People are tired of their current jobs and they see other opportunities. There are all kinds of jobs now and companies are desperate for people to come and work for them, so there are now a lot of opportunities to move from one job to another. Since the last three With the market up so much in 2018, many people also have the opportunity to retire early.”
Whatever you decide, just make sure you focus on the future, Francis advises.
“When you’re changing, stop, think, relax, reflect, consult with others and get feedback.”
Tiffani Sherman is a freelance journalist based in Florida with over 25 years of experience writing about finance, health, travel, and other topics.
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