I'm in My 20s and Keep Getting Laid Off. Should I Invest in My Employer's 401(k) or Look into Other Options?

Dow Jones
10/02

'I have lost faith that the traditional career spanning decades at one company even exists anymore'

"I've been laid off multiple times in my short career." (Photo subject is a model.)

Dear Dollar Signs,

I'm a Gen Z-er wondering how much I should be investing in my 401(k). I've been laid off multiple times in my short career and I have lost faith that the traditional career spanning decades at one company even exists anymore.

I currently work at a company that matches contributions, which is a great benefit, but I'm curious if there are better options, especially for someone always expecting the next layoff and potential career pivots.

How much should I focus on my 401(k) versus other long-term strategies?

Retirement Rookie

If you're just starting out on your money or career journey and have questions about how to navigate your finances, we want to hear from you. Write to Dollar Signs, MarketWatch's new advice column, at dollarsigns@marketwatch.com.

Dear Rookie,

These are two separate issues. Just because you are stressed about your career trajectory doesn't mean you shouldn't take advantage of employer benefits. As you point out, your company offers an employer match. Let's say you get laid off tomorrow: The money you contribute is still yours.

An employer match might also be yours, depending on whether the company has a vesting schedule - a certain amount of time you need to work there in order for the funds to be yours.

By not investing, you are literally leaving free money on the table.

"There is no reason to lose faith in retirement accounts just because your career doesn't have the same steady, linear trajectory you thought it might," says Dinon Hughes, a certified financial planner at Nvest Financial who is also a Gen Z-er. "I get the overall angst, but I don't think it needs to be directed toward the corporate retirement plan."

When it comes to other options - yes, there are a few. Hughes suggests opening a Roth IRA. These offer tax-free growth, and you can contribute up to $7,500 per year if you're younger than 50. You're in your 20s, meaning your income probably hasn't peaked yet and you can lock in a lower tax rate, too. A traditional IRA offers tax-deferred growth and also has a contribution limit of $7,500.

If you end up having multiple jobs and multiple 401(k)s, you can combine all your retirement savings and roll them over into a traditional IRA, without triggering a tax bill.

"Even if you go through 10 or 20 employers, you can combine them all into your IRA," Hughes says.

Health savings accounts are also good investments, too, especially if you are healthy and young. You can pay lower premiums, contribute up to $4,400 a year for an individual, and many companies offer an employer match. You can withdraw from an HSA for medical expenses tax-free, including expenses from the previous year.

If you have few medical expenses, the money stays in your HSA and can build, potentially for decades. After you reach age 65, you can withdraw HSA money for nonmedical reasons without incurring a 20% penalty, although your withdrawals are usually still taxable as ordinary income.

If you're in an especially volatile industry and worried about layoffs, I'd also recommend building up your emergency savings fund. Experts recommend you have at least six months' worth of expenses saved up - for rent, bills, groceries and all the non-negotiable costs - so that if you do end up losing your job, you have some cushion.

Be sure you're attending networking events, staying in touch with old bosses and colleagues, and keeping your resume up to date. We often only think to do these things when we're between jobs, but the best way to protect against job insecurity is to be active in your industry. If a role does open up, people are much more likely to recommend you if you've put effort into maintaining your relationship.

No matter how many career pivots you make, you can take the money you invest in a 401(k) with you - it doesn't matter how long you stay with a company. Continue to invest in your 401(k), at least for the percentage of your employer match. If you want to diversify a bit, a Roth IRA is a great option.

 

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