While changing jobs can boost a career, it also can deplete retirement savings. And as an increasing number of people are hopping between work shops, they could be sacrificing tomorrow's comfort for today's pay raise.

This is a problem for Baby Boomers especially, some of whom are nearing retirement just when health care costs are rising.

According to a recent study from outplacement firm Challenger Gray and Christmas, "job switching is a trend that has nearly doubled in recent years amongst Baby Boomers." In 1991, Challenger found that 23% of job seekers with a median age of 43 had worked for four or more companies. By 2001, the median age climbed to 45 with 41.6% having worked for four or more companies. "That averages a new job at least every five years for these individuals," the report stated.

"I'm amazed at how often people jump into their new jobs because they have a higher salary," says Eric Tyson, author of Personal Finance for Dummies . "The average person doesn't look at the importance of their benefit packages."

Indeed, the average account balance for older Americans with a 401(k) plan is dropping, according to most recent data available from the Employee Benefit Research Institute , or EBRI. Because strong stock performance won't necessarily save a weak retirement plan, Boomers considering a job change should consider what they have to lose, not gain.

Nothing Now, Less Later

When you change jobs, you won't be immediately enrolled in your new company's defined-benefit or defined-contribution plan. "About half the companies make you wait a year," says David Wray, president of the Profit Sharing/401(k) Council of America, a nonprofit association of companies that sponsor 401(k) plans. "That means there'll be a year where you can't contribute to the plan, so you need to make sure that you're contributing to an IRA in the meantime."

Under a defined-benefit plan, also known as a pension, you receive a portion of your salary from the company after you retire. Under a defined-contribution plan, or a 401(k) plan, you allot the amount you want to save for retirement, while the company may match what you put in -- or not.

If your company does match your contributions in any way, consider yourself lucky. Because of the recession, many major companies such as Ford, DaimlerChrysler and Bethlehem Steel have stopped matching employee contributions to 401(k) plans. "You go back five years ago, and matching contributions was far more prevalent than today," says Rick Bloom, a certified financial planner with Bloom Asset Management in Farmington Hills, Mich.

Change jobs within six years and you may not be able to take that company contribution with you, depending on your retirement plan's vesting schedule. "In two-thirds of the cases, you're going to have to work at a company for some period before you fully own the company contribution," Wray says.


Retirement Savings
Older and shrinking
Age Avg. 401(k) Account Balance 1999 Avg. 401(k) Account Balance 2000 % Annual Change
20-29 $8,219 $10,431 +26.9%
30-39 31,518 33,125 +5.1
40-49 62,059 62,694 +1.0
50-59 98,139 95,836 -2.3
60-69 122,240 115,206 -5.8
Source: EBRI

No matter what kind of retirement plan you have -- a defined-contribution plan or a defined-benefit plan -- they all vest in one of three ways: cliff, grade or immediate vesting.

Cliff vesting is an "all or nothing" scenario. An employer's contribution to your retirement doesn't count until you work a set amount of time, typically four years. "If you left before the four years, you would get nothing," says Craig Copeland, senior research associate for the EBRI.

Grade, or gradual, vesting is an "all or something" scenario. In other words, benefits are accumulated over time -- typically five years. Under a five-year plan, an employer matches one-fifth or 20% of your first-year contribution. A fifth is added every year until year five, when the company match reaches 100%. So if you had $10,000 saved after four years, your employer would match only 80%, or $8,000. You lose $2,000 by leaving a year before you're fully vested.

Immediate vesting is just what it sounds like. All employer contributions count 100% on the first day of your new job. "There's no retirement loss from changing jobs," says Copeland. "You know right away what you're going to get."

But such plans are uncommon. Copeland says that 96% of all defined-benefit plans use cliff vesting, 3% use gradual and only 1% use immediate. For defined-contribution plans, Copeland says a third vest immediately, another third use cliff vesting and the final third use grade vesting. "It is wise to understand what you actually get when you leave," he says.

The Pension Pinch and Loan Liability

If you're lucky enough to have a defined-benefit plan, changing jobs can seriously affect your retirement income. Under the average pension, you receive 1.5% of your salary for each year spent at the company, which is multiplied by your average salary for the last five years. So, if you've been with a company 10 years and averaged a $50,000 salary during your last five years, you'd receive 15% annually, or $7,500, for the rest of your life.

The longer you stay with a company, the better your benefits will be. An employee with an average salary of $100,000 for the final five years would make $15,000 more a year in retirement by staying 20 years instead of 10. "The employers want people to stay," Wray says.

If you've taken a loan against your 401(k) plan, changing jobs could cost you dearly. "When your paycheck stops, you must pay off the loan immediately or the outstanding balance is defaulted," Wray says. "Which means that your outstanding loan balance is treated as a planned distribution for tax purposes -- this means you owe the fed government and the state approximately 40%."

Here's how it works: Let's say you have $12,000 in your 401(k) plan and have borrowed the maximum against it, $6,000, or half of the value of the plan. By changing jobs and not paying the loan, you default on the $6,000. The company notifies the IRS that you made a planned distribution before the age of 59-and-a-half, which forces you to pay taxes on the $6,000, plus a 10% penalty for early withdrawal. Together, the taxes and penalty can exceed 40%, or $2,400. All told, you've made an $8,400 mistake.

According to the EBRI, 18% of eligible 401(k) plan participants had outstanding loans against their plans in 2000, up from 16% in 1998. Wray advises that people pay off that loan by any means possible before leaving the company. He recommends a bridge, or a short-term loan, but if that's not possible, "it's the one place I advocate credit cards," he says.

Drugs and Disability

With health care costs on the rise, leaving behind a medical plan that can provide supplemental coverage during retirement is also a mistake, especially considering skyrocketing pharmaceutical costs. Between 2000 and 2010, the American Association of Retired Persons expects prescription drug spending per American to rise 11.2% a year.

"Under Medicare, people have all sorts of co-payments and deductibles, but under a retiree benefit plan, it would pay those," says Copeland, who also points out that the number of companies offering retiree health benefits is quickly decreasing. The percentage of employers offering supplemental heath care to retirees fell from 35% in 1995 to 24% in 2000, according to the AARP. If you've got a medical plan that offers supplemental health care during retirement, Copeland says you'd be wise to keep it.

Another benefit that is often overlooked: disability insurance, which pays you an income in case of a serious illness, accident or disability. "In my experience, people almost never bother to look into disability. I'll ask people, and they don't even know if their company has it," says author Tyson.

Seniority and Security

While the grass might appear greener on the other side, jumping fences could be a bad idea, especially in the current economy. "In this economy, where companies are much quicker to lay people off, it also creates an additional risk," says Bloom, the certified financial planner. "They're going to tend to lay off someone who is brand new."

The older you are, the more carefully you need to consider how a job change will affect your retirement. "The future is here," Copeland says. "You're not 30 anymore."

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