These days people rarely remain with one employer for their entire working lives. More frequent job switching and layoffs present some hidden financial dangers, though.
What should you do to plan for switching jobs? How can you protect your pension, 401(k) plan, health insurance and life insurance? CBS MarketWatch's Betsy Karetnick tells CBS This Morning what not to do and how to plan for gaps between jobs.
If you are leaving your job you should:
- Find out if you are vested.
Vested just means you've been with this company for a certain amount of time and therefore eligible to take any money in pension funds or 401(k) plans with you. If you are not vested, you do not get the money that the company has put in for you. It's as simple as that.
You have to decide whether the money you will leave behind is more than what you will make at your new job. If you'll be making $50,000 more in your new position and will only leave behind $3,000, it's worth the loss.
- Leave pension funds in an account.
If you have money in an account, don't ask the company to write you a check. Cashing out is your biggest mistake. Even if it is a small sum, you would lose a lot with taxes and penalties.
What if you are 23, in the 28 percent tax bracket, with $2,000 in a pension fund and about to leave your job? If you take the $2,000 with you, after penalties and taxes, you will lose about 40 percent of the $2,000. If you leave the money alone and assume it earns an average of 10 percent, after taxes you'll clear more than $81,000 at age 65.
This account has tax-deferred benefits because it's for retirement. You lose those benefits if you take out the money right now and buy a new car.
- Make sure you have health coverage.
You have to worry about health insurance whether you are between jobs or in a new job but not yet eligible for this benefit. The options are to use COBRA or purchase coverage.
COBRA is a federally mandated rule that allows you to continue to use your previous employer's plan when you pay the premiums. The cost varies but if you're thinking of switching jobs, it might be a good idea to put extra money aside for this. You don't want to leave your family without insurance because one medical emergency can wipe you out.
- Make sure you have life insurance.
Again this benefit applies if you are between jobs or in a new job and not yet eligible for benefits. The best bet is term life insurance. This is insurance for a certain amount of money for a fixed period of time - six months, a year, five years, basically as long as you need it.
- Guard your retirement funds.
Make sure you don't lose time waiting until your new 401(k) plan starts to work. Contribute the maximum amount you can to an IRA or put money into a separate investment account even if it doesn't have a tax-deferred benefit.
You may say, "I'll just wait unil my new 401(k) plan kicks in." But if you just invest, for example, $1,000 during that time and it grows 10 percent a year, over another 30 years of working life that $1,000 will grow to more than $14,000 after taxes.
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