Why Switching Jobs Can Boost Your Paycheck—But Hurt Retirement Savings

Changing jobs can score you a raise, but it could also hurt your retirement savings in the long run if you’re not paying attention to fine print in your 401(k) plan.

The trouble isn’t that people change jobs and take bigger salaries; its that when they do, they often skip steps that would help them maximize retirement savings at the new gig.

A median job switcher earns a 10% raise, a recent Vanguard study found, but they also experience a 0.7 percentage point decline in their 401(k) savings rate when they switch—because they often allocate less money to their retirement accounts than they did before. While this may not seem like a huge loss to one’s retirement savings, it can add up over time.

For example, a worker who earns $60,000 at the start of their career and changes jobs eight times would lose out on $300,000 worth of potential retirement savings, the Vanguard researchers found.

Vanguard researchers blame the current design of 401(k) plans that are not conducive for multiple job changes, and say employees could be leaving money on the table if they don’t pay attention to the fine print.

“The job change proves to be a friction point that causes a slowdown in retirement wealth accumulation,” the researchers wrote.

Why Do Retirement Savings Diminish With Job Changes

In theory, if your paycheck increases, you should also be able to save more. That’s not always what happens in real life.

Vanguard analyzed the finances of people who switched jobs between 2015 and 2022 and found that a majority of workers who received a raise (55%) ended up reducing their 401(k) savings rate at their new job.

Those with raises of 10% or less reduce their savings rates and savings in dollar terms, while those who get a more than 10% salary boost reduce their savings rate but end up setting aside more in dollar terms.

So why do workers allocate a lower percentage of their salary to retirement when they switch jobs? One reason could be lifestyle inflation or lifestyle creep, which is a phenomenon where a bump in income leads to increased spending making it hard to save.

Another is due to the way 401(k) plans are structured. There are two features in 401(k) plans that aim to make retirement savings easier for workers—automatic enrollment and automatic escalation. Automatic enrollment ensures new employees start saving without having to take any action of their own, and automatic escalation increases a worker’s 401(k) savings rate, typically by one percentage point per year, up to 10%.

The issue with automatic enrollment, according to Vanguard researchers, is that the default savings rate is only 3%. Also, with a median job tenure of five years, many workers are missing out on the benefits of automatic escalation because they don’t stay in jobs long enough.

Switching jobs too soon may also affect your retirement savings because it won’t give enough time for you employer’s contributions to vest.