Late career changes are more common than you think. With many opportunities available in the job market, transitioning careers can enhance your job satisfaction and increase your income. Yet, what does a transition mean for your retirement savings? While a new career path can offer more fulfillment, it’s important to consider this change’s impact on your retirement plans.
The Financial Impact of Career Transitions Near Retirement
Making a career change later in life can bring exciting opportunities, but it also introduces potential financial risks — especially when retirement is on the horizon. One of the most critical factors to consider is how a career transition could affect your long-term retirement savings.
For example, after working for decades with a single employer, changing jobs could result in a shortfall of up to $300,000 by the time you retire. This shortage occurs due to lost retirement benefits, reduced employer contributions or a disruption of compounding interest.
However, switching employers is common. According to a report by Vanguard, the average American worker has nine different employers throughout their career. While the median worker may see a 10% pay increase, retirement savings often decline. On average, employees experience a 0.7% drop when switching jobs.
This decrease can lead to substantial long-term consequences. Still, you can adjust retirement planning by understanding how a job switch could alter your savings rate and overall retirement timeline.
How a Career Switch May Change Your Retirement Timeline
Say you’re 55 and decide to take a new job offering a higher salary. While this sounds like a great financial move, the new employer’s retirement plan might not match your contributions as generously as your previous job.
Suppose you contributed 6% of your salary before — with a 4% employer match — but now your new job only matches 2%. In that case, that’s a 2% difference in free money you’re no longer receiving.
Over the next 10 years, that contribution reduction, with a potential loss of compound interest, could delay your retirement for several years. If you neglect to account for the impact on your savings rate, you may need to work longer than planned.
That’s why carefully evaluating how a career change may affect your retirement goals is crucial to staying on track.
Why Transition to a New Career Before Retirement?
There are many reasons someone may choose to change careers later in life. Shifting priorities, evolving work preferences, and market conditions make such transitions appealing. The following insights are key reasons older professionals seek new opportunities.
1. Pursuing New Opportunities in a Changing Job Market
With the job market constantly evolving, older workers are finding it more feasible than ever to switch careers. According to the Bureau of Labor Statistics, there are currently 11.3 million job openings in the U.S., meaning professionals have significant room to explore new roles or industries entirely.
This openness in the job market appeals to those seeking more fulfilling work as they approach retirement. Many older adults have considered switching jobs because of emerging opportunities.
The abundance of job openings provides flexibility and choices for those who may have plateaued in their current roles or industries. For many, moving to a new career offers a fresh start and a way to reinvigorate their work life.
2. Seeking Less Physically Demanding and More Flexible Work
As professionals age, their work preferences often shift to prioritize less physically strenuous jobs and offer more control over their time. Pew Research found that older workers strongly prefer jobs requiring less physical activity and providing greater schedule independence. Whether it’s to reduce the strain of long hours or physical labor, many individuals opt for careers that better align with their changing lifestyle needs.
3. Transitioning to Entrepreneurship or Selling a Business
Another driving factor behind career transitions for those nearing retirement is the opportunity to pursue entrepreneurial ventures. Research shows that more than 500,000 businesses change hands annually as business owners look to retire or move on to new opportunities. For many professionals, the decision to sell a company they’ve built over the years is a natural next step, allowing them to retire comfortably or move into a more passion-driven role.
Conversely, some retirees may find excitement in starting a new business they’re passionate about. These entrepreneurial moves offer financial benefits and personal fulfillment.
4. Seeking a New Challenge
As people approach retirement, many find themselves reassessing what they want out of their careers. For some, this leads to a desire to pursue work that is more meaningful or aligns better with their personal values. Whether switching to a nonprofit, education, or consulting role, older professionals often make career transitions to find personal satisfaction in their work.
With new opportunities constantly emerging, this transition can offer the chance to take on a new chapter, free from the pressures of climbing the corporate ladder or enduring the same routine for years.
Aligning Career Transitions With Retirement Planning
Before transitioning to a new career, you must plan out your finances to ensure you maintain your retirement goals. While new opportunities can be exciting, aligning them with long-term financial security is critical for a smooth transition. A few key strategies allow you to manage career changes while staying on track for retirement.
1. Evaluate Retirement Benefits in a New Role
The most essential step in any career change is determining how your new role will impact your retirement savings. When moving to a new position, it is crucial to assess whether the new employer offers retirement benefits, such as a 401(k) or pension plan.
If the new role lacks these benefits, you’ll need to take matters into your own hands by setting up an independent retirement savings plan, such as contributing to an IRA or continuing investments in your existing retirement accounts.
Since a new role could lead to a shortfall in your long-term savings, it’s essential to prioritize retirement contributions when negotiating job offers. Doing so will prevent gaps in savings during this transition.
2. Moving Retirement Funds to a New Company
You can often roll over your old 401(k) into your new employer’s plan, simplifying your retirement savings management and keeping your funds tax-deferred.
Rolling over your retirement account helps you avoid the potential pitfalls or early withdrawals, which come with significant penalties. Withdrawals before the age of 59 1/2 can trigger a 10% penalty in addition to the income taxes owed on the amount, reducing your retirement savings. You should roll over your funds into a qualified retirement plan to maintain your financial health. If you can’t roll your old 401(k) into a new 401(k), you still have options:
- Traditional IRA rollover: This option transfers money from a 401(k) to a traditional IRA account. The earnings you accumulate become tax-deferred, while zero taxes are due when rolling over.
- 401(k) to Roth IRA: The second option involves rolling your 401(k) to a Roth IRA. This rollover is similar to the first option, except you must pay taxes on this conversion.
- Roth 401(k) to Roth IRA: A Roth 401(k) involves funding after taxes. When you convert this money, you won’t have to pay taxes, and new earnings will be tax-free when you meet certain conditions.
3. Keeping Your Retirement Savings With Your Previous Employer’s Plan
Sometimes, you may leave your retirement funds in your previous company’s plan. You could use this option to avoid immediate changes to your retirement savings, but there are several factors to consider before making this decision.
First, if you have less than $5,000 in your 401(k), your former employer may require you to transfer your funds to another account. If your balance is under $1,000, the company will likely issue you a check for the amount. In this case, depositing the check into your new employer’s 401(k) plan or an IRA within 60 days is crucial to avoid taxes and penalties.
Another factor to consider is whether you were fully vested in your former employer’s matching contributions. Employer matches typically vest over time, meaning if you weren’t fully vested when you left, you may be entitled to a portion of it or none at all. Understanding your vesting status is key to determining the amount of your employer’s contributions you can keep.
401(k) accounts also come with maintenance and transaction fees that can eat into your long-term returns. Before leaving your funds in your former company’s plans, ensure you understand the fee structure and how it could impact your savings over time.
Lastly, if your 401(k) account includes publicly traded stock in your former company that has appreciated significantly, there are tax considerations to remember. Rolling over your 401(k) into a new employer’s plan or an IRA may cause you to lose the potential tax benefits from in-kind distributions of the stock. Sometimes, this could mean paying more taxes when you eventually access the funds.
4. Leverage Knowledge and Skills to Negotiate Higher Compensation
Upward and horizontal career transitions contribute to long-term career success. Moving into a higher-ranking career can lead to notable salary progressions for older workers.
Studies have found that older adults benefit from vertical transitions more than their younger counterparts, as they can more effectively leverage their years of experience and expertise. Therefore, seeking roles that align with your skills and industry knowledge is important. Doing so will enable you to negotiate better compensation packages while maintaining strong financial footing as you approach retirement.
5. Apply Strategic Resource Management During Career Transitions
As you navigate a career change, you can apply resource management to ensure your move supports your career and retirement goals. Research drawing on the conservation of resources theory suggests that older workers focus on leveraging their strongest assets — such as their network and accumulated knowledge — to secure roles that align with their experience. This approach allows you to preserve valuable resources while minimizing risks during the transition.
For instance, you may rely on established industry relationships to land a role that offers better benefits or greater flexibility while ensuring your retirement savings remain on track. Manage your resources strategically to make informed decisions, as this will contribute to long- and short-term financial security.
Financial Strategies to Support Career Transition and Retirement Savings
Maintaining your retirement savings can feel overwhelming, especially with the rising cost of living. Two-thirds of retirees and 84% of employees express concerns about the growing cost of living, making it harder to save for the future. To overcome these challenges, you can implement various financial strategies.
One method is diversifying income streams. For example, 47% of people aged 65 or older maintain their retirement savings with interest dividends or rental income. If you have investments or rental properties, maximizing the returns from these assets can alleviate financial pressure from a career change.
Additionally, selling cash-secured puts can be another way to generate income while acquiring discounted stocks. This involves selling options backed by cash, allowing you to earn a premium while setting yourself up to buy stocks at a lower price if the market dips. Growing your portfolio without taking on excessive risk is a good option.
Risk Management for Insurance and Health Care Coverage
Another consideration is risk management strategies that protect your financial and physical well-being. Strategies include evaluating your insurance coverage and health care to maintain financial stability during and after a career change.
Health Care Considerations
Health care is a significant concern for older professionals nearing retirement, and the cost can be substantial. Experts estimate that individuals 65 and older may need around $165,000 in after-tax savings to cover health care expenses throughout retirement. Therefore, securing reliable health insurance is crucial to avoid disrupting your savings by the time you retire.
If your new job offers health care benefits, compare them with your previous coverage to avoid out-of-pocket costs. You might also explore whether supplemental health insurance — such as Medicare Advantage or Medigap — can fill gaps in coverage as you near retirement.
Life and Disability Insurance
In addition to health care, evaluating life and disability insurance needs is an integral part of risk management. Employer-sponsored plans typically provide a baseline level of coverage. Yet, if you move into a role without these benefits, you’ll need to secure your own coverage.
When assessing your insurance needs, consider the coverage necessary to replace your income and provide for any dependents.
Managing Career Changes With Confidence
Changing careers later in life can be easy with the right strategies. As you approach this new chapter, careful planning and risk management are essential to remain on track for a comfortable retirement. Ultimately, balance is key — balancing your career aspirations with your retirement plans ensures they align for a successful future.
Featured Image Credit: Photo by Nino Sanger; Pexels
