Your Investing Life: Changing jobs
September 03, 2013
A new job means managing lots of changes. You've likely already considered whether your new duties will suit your strengths, if you'll feel comfortable in the working environment, and what pay and benefits you'll receive. But there could be more changes to your investment strategy and financial plan than you've anticipated.
Here are some ways changing jobs can affect your investing life—and what you do to prepare for them.
Don't forget about a retirement account with a previous employer
If you participated in a retirement plan a previous employer offered, you'll want to keep that money invested for your retirement. It can be tempting to treat your savings as 'found' money, especially if your employer just sends you a check. But spending that lump sum instead of saving it could have some unexpected consequences. "Cashing out your retirement account balance means paying income tax on the withdrawal, as well as penalties if you're under age 59½," Vanguard's Ellen Rinaldi wrote in a 2009 blog post.
Your family life. Your work life. Your investing life.
When "life happens," your financial and investing plans can sometimes get moved to the back burner. These articles can help you bring your investing life—and its effects on your (and your family's) financial future—back to the forefront.
You could also miss out on the opportunity to realize investment returns on your savings over time, especially if you have 20 or more years until you retire. The additional time can make a difference in the amount of your nest egg. This calculator can give you an idea of the impact cashing out may have on your retirement savings.
You may be able to leave your savings in your previous employer's plan. But you could end up keeping track of multiple accounts if you change jobs often and continue leaving money behind each time. "In situations like this, it's easy to overlook your beneficiary designations, or even to lose track of your money," said Ms. Rinaldi.
Explore your options. If you have a new employer that offers a retirement plan, you may be able to roll your balance into it. Ask the benefits team for details about the plan's policies so you can make an informed decision. Or consider rolling your savings into a traditional or Roth IRA. For more on the benefits and drawbacks of each option, check out this comparison or talk to one of our rollover specialists by calling 800-523-9442.
Review your investment portfolio
Take a look at how the money you've invested is divvied up (or allocated) into stock, bond, and cash investments (also called asset classes). The amount of risk you'll take on is determined by this division.
The asset allocation—the percentage of your portfolio invested in each asset class—that makes sense for you is based on your goals, time horizon, and comfort with the unpredictability of the investment markets. Our investor questionnaire can offer suggestions for an allocation that suits your situation and preferences.
If you have investments in addition to your retirement savings—maybe an inherited IRA, a 529 plan for kids' college educations, or a brokerage account with individual securities—you'll want to include them in your review.
Our Principles for Investing Success can help you make sound decisions about how you invest—not just for retirement, but for a variety of your financial goals.
Update your beneficiaries
When you change jobs, it's a good time to check your beneficiary designations. Having both your primary and secondary beneficiaries recorded helps make a difficult situation for your heirs easier. It also assures that your assets are distributed according to your wishes, rather than by default as required by law. "Especially for second marriages, domestic partnerships, and blended families, it's important to carefully review the beneficiary designations on all 401(k) plans, IRAs, and life insurance policies," said Karin Risi, who leads Vanguard Advice Services, in a blog post.
A few other things to think about
Your job change may also affect other areas of your financial life. Here are some other things to keep in mind.
- Consider the tax implications: Did your tax bracket change along with the income from your new job? If yes, consider adjusting the amount you have withheld from your paycheck (or that you set aside to pay your taxes). You might find that you've been withholding more than you need. You'll have to weigh the benefits of having a nice-sized refund in the spring over taking home a little more each pay period.
- Shore up your emergency savings: It's always a good idea to have some savings set aside just in case. Many financial advisors recommend saving anywhere from three to 36 months worth of living expenses. Not sure where to put your emergency savings? Our research paper on how to manage cash in your portfolio may help you. Money market funds, such as those Vanguard offers, are one common type of investment for emergency savings. If you're taking home more pay from your new job, an easy way to build up your emergency fund without feeling the income pinch is to have the increase direct deposited into a savings or money market account.
- All investing is subject to risk, including the possible loss of the money you invest.
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- For more information about Vanguard funds, visit Funds, Stocks, & ETFs or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- We recommend that you consult a tax or financial advisor about your individual situation.