Suze Orman Warns: This 401(k) Mistake When Switching Jobs Could Cost You $300,000

Switching jobs can be a positive step for your career and your paycheck, but it could come with a hidden cost to your retirement savings. Financial expert Suze Orman recently warned that failing to adjust your 401(k) contributions after switching jobs could leave you with significantly less money in retirement — up to $300,000 less, according to Vanguard. 

“There's nothing nefarious going on,” Orman wrote in her blog. “Just unintended consequences of well-intentioned 401(k) plan features that can backfire a bit.”

Here's why it happens and how you can avoid this costly mistake.

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How Job Switching Affects 401(k) Contributions

It's common for workers to change jobs multiple times over their careers. According to Vanguard, the average worker can expect to have nine different employers in their lifetime. While higher salaries are often part of the benefit of switching jobs, retirement savings can take a hit if you don't pay attention to how your new employer sets up your 401(k).

Many employers now automatically enroll new employees in their retirement plan, which is generally a good thing. However, the default contribution rate is often set low — typically around 3% of your salary. Orman points out that if you had been contributing 10% or more to your previous 401(k) and your new employer sets you at 3%, you're suddenly saving much less for retirement without even realizing it.

Vanguard's research found that less than half of job switchers maintained or increased their savings rate after starting a new job. This drop in contributions could have long-term consequences for your retirement security.

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The $300,000 Mistake

The financial impact of this drop in contributions can be significant. Vanguard's analysis compared two scenarios in which a worker starts their career at a $60,000 salary:

• A worker who starts saving at 10% of their salary from age 25 and keeps that rate consistent throughout their career.
• A worker who switches jobs eight times over their career and is automatically enrolled at a 3% contribution rate each time.

The difference in retirement savings between the two scenarios amounts to about $300,000 — enough to cover roughly six years of living expenses in retirement.

Orman stresses that this gap isn't due to poor investment choices or market downturns. Instead, it's the result of relying on default contribution rates that are too low.

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How to Avoid Losing Out

Orman says this is an easy mistake to fix. She advises that when you start a new job, you should immediately check the default contribution rate for your new 401(k). If it's lower than what you were contributing at your previous job, increase it right away.

"My advice is to get to 10% as fast as possible, and if you didn't save in your 20s and 30s, a 15% annual contribution rate is needed to build retirement security," Orman wrote.

Additionally, don't let a higher salary tempt you into contributing less. Orman recommends maintaining the same percentage contribution even if you're making more money. Since you're not yet accustomed to the higher income, increasing your savings won't feel like a sacrifice.

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