NEW YORK (MainStreet) — As Millennials and Gen X-ers change jobs every few years as they climb up the corporate ladder, investing in an IRA may be their best bet to save for retirement.
Switching jobs every four years, or even more frequently, is becoming common as the dynamics of the workplace have shifted. Since the 2008 financial crisis, job hopping is becoming the norm and is replacing the previous formula of getting a college degree, landing a job at a company, staying there long term and benefiting from a generous pension package, said Jonathan Alpert, a New York-based psychotherapist and author.
“My business coaching clients on average change companies every three to four years and this is on par with the Bureau of Labor and Statistics,” he said. “In many respects, Millennials are striving to better themselves, searching for the next promotion or advancement in rank and they have the courage to do so -- on the other hand, it creates instability and spikes peoples' anxiety levels and fear.”
Millennials are changing jobs even more often with 91% of them expecting to stay in a job for less than three years, according to the Future Workplace survey, said Terry Dunne, managing director of automatic rollovers at Millennium Trust, an Oak Brook, Ill. financial services company.
Investment retirement planning has become much more complex, but one of the best options is allocating your salary into an IRA, he said.
“An IRA is relatively easy to administer, flexible and inexpensive,” Dunne said. “It is mobile. If you move, it is not affected.”
Employees who find themselves changing jobs frequently voluntarily or under pressure because of the economy, should still start by investing with their company’s 401(k) plan if the funds are matched, said Bill DeShurko, a portfolio manager on Covestor, an online investing company with offices in Boston and London.
“Do not throw away money by not contributing to a 401(k) up to the employer match,” he said. “I don’t see ‘changing jobs frequently’ as an excuse to not use a 401(k) – when you are getting close to retirement do you really want to look back and realize ‘you could have had more,’ but you were too lazy to fill out a form? Sorry, but investing is not effortless.”
As you change jobs, open an IRA to consolidate accounts. With an IRA account, you can transfer funds from the former employer’s 401(k) to your own IRA.
“This way you can consolidate your accounts and make tracking and managing your funds easier,” DeShurko said.
If your employer does not offer a matching contribution, then contribute to your IRA. In 2014, you can receive a tax deduction for a contribution up to $5,500.
If your company does not match your 401(k) or you are contributing an amount above what your company matches, then opening a Roth IRA allows your earnings to grow tax free.
“This can provide significant tax free income in retirement and adds flexibility to retirement income planning,” he said.
Even before you retire, you can always withdraw your contribution tax free since you already paid income taxes on the income used to make your contributions. This adds flexibility that an IRA or your 401(k) plan cannot provide.“So for a home down payment, college for kids or even a vacation, you can withdraw an amount equal to your contributions tax and penalty free,” DeShurko said.
Roth IRAs are great “hybrid” investments, he said.
“If you are young, put even your ‘emergency’ money in a Roth IRA,” DeShurko said. “Just pick a safe investment vehicle. Even though interest rates are low, even a little interest can grow to a nice nest egg at retirement if it grows tax free.”
Investors who have allocated a decent amount of income into their 401(k) or IRAs should also establish a health savings account, said Michael Solari, principal of Solari Financial Planning in Bedford, New Hampshire.
“A health savings account is the only account that offers a triple tax benefit,” he said. “There are tax deductions for the contributions going in, there is tax free growth and you receive tax free distributions on qualified medical expenses.”
Another key issue for some employees is owning investments which are liquid, which can be an important factor if you move often and need cash for first and last month’s rent or a deposit for a lease, a down payment to purchase a house or other expenses.
“Some investments like money market vehicles, mutual funds and stocks are more liquid than CDs and alternative investments,” said Dunne.
Whether an investor systematically buys a few shares of a low cost S&P 500 index fund at Vanguard with every pay check or fund a savings account at a local bank, the key is to pay yourself first by saving a portion of your income, said Abigail Gunderson, a certified financial planner for Tanglewood Wealth Management in Houston.
“Setting up an automatic debit plan and treating it as if it was one of the ‘bills’ may be a better approach to launch one’s retirement savings plan and keep the strategy consistent over one’s working career,” she said.
People need to change the way they view employment and get out of the pre-2008 mindset, said Alpert.
“By being flexible and accepting the notion that times are still tough and it really is O.K. to switch jobs every few years, despite what others may think, they'll be in much better shape,” he said.
--Written by Ellen Chang for MainStreet