Are you a millennial? If so, you’ve probably been blamed for the demise of everything from dinner dates to face-to-face interactions. But, you’ve got one thing other generations wish they still had – time. Here’s how to make the most of your working years.
I’m a millennial. So, I understand the appeal of certain financial opportunities. My advice: Don’t fall victim to career and financial mistakes that may look like good deals at first glance!
Switching Jobs without Evaluating the Cost
While your parents may have worked for the same company most of their career, that won’t hold true for younger generations. LinkedIn recently released a study that showed millennials will average four job changes by the time they reach age 32.
Job-hopping is considered one of the fastest ways to increase your salary. But it can also negatively impact your finances, making that new opportunity less lucrative. For example, if you are contributing to your current employer’s 401(k), the balance you see on your statement may not yet be entirely yours. Any matching contributions from your employer may take years to fully vest. Let me explain:
Any money you contribute to your retirement plan is always available to you regardless of the length of your employment. However, employer contributions typically vest using one of two different methods. It’s important to know which one your company uses.
- Cliff vesting. An employee has complete ownership of employer contributions after a specified time period, such as two years, but no ownership before that time.
- Graded vesting. As each year passes, an employee attains some percentage of ownership until fully vested. For example, if the plan uses a five-year vesting schedule, the employee’s ownership increases 20 percent per year with 100 percent vesting after year 5.
Also, most employer-sponsored retirement plans require employees to work a minimum time period, e.g. six months or even a full year, before being eligible to make contributions. So, if you change employers, you may be missing out on tax-deferred savings as well as the employer match for awhile.
Before leaving for greener pastures, determine how much “green” you would be leaving behind in terms of months of lost company contributions toward your retirement fund!
Jumping into Bad Debt
There’s debt. And then, there’s bad debt! You need to know the difference. According to an American Funds survey, 13 percent of Americans borrowed from their retirement plans in 2015.
With a 401(k), you can typically borrow up to 50 percent of your vested balance (capped at $50,000) without a credit check or going through a bank approval process. Sounds good, doesn’t it? But in most cases that’s a bad idea. For starters, it typically must be repaid within five years. Secondly, you miss out on all the potential investment growth on those borrowed funds and that’s difficult to regain.
In addition, changing jobs while you have an outstanding 401(k) loan can be a problem. You must repay the entire loan balance within 90 days or it’s taxed as a distribution. Plus, if you’re under age 59 ½, you’ll have to pay an additional 10 percent penalty tax! The IRS strongly recommends that you speak to a financial advisor before borrowing from your retirement account. You may have a better option for meeting your financial need.
Failing to Explore and Optimize Opportunities
Many employer retirement plans have a feature called “auto-enrollment”. When a new employee becomes eligible to participate, a contribution to the retirement plan is automatically started unless the employee “opts out”. The percentage is generally in the one to three percent range and is simply meant to get an employee started in the retirement plan.
While any amount of employee savings will trigger the company match, this low contribution rate is probably not going to provide you with what you’ll need for retirement. Determine how much you are able to contribute and maybe stretch yourself to get to the amount required to get the maximum employer match. But as income rises, consider increasing that amount. Don’t be afraid to bump it up!
Just because your employer offers a retirement plan doesn’t mean that’s the only savings option available. Once you maximize your 401(k) contributions, consider contributing to a Traditional or Roth IRA.
When making significant life and financial decisions, examine all information before taking action. Without a clear understanding of the potential consequences, your well-intentioned plan may turn into an unfortunate mistake. And don’t ever stop searching for opportunities to maximize your savings!