Everyone with access to a 401(k) should definitely be contributing. If you’re not, it’s a mistake you’ll regret later when you’re older. This post will cover some common pitfalls that might be diminishing your 401(k)’s potential so you can make more informed decisions and hopefully increase your savings.
First off, don’t count on the government to help you out in retirement. With Social Security underfunded and the government already in debt, expect them to possibly raise taxes or the retirement age. This makes it even more crucial to manage your 401(k) wisely.
I made some errors with my 401(k) in the 13 years I contributed, which ended up costing me about $150,000. Let’s dive into some of these mistakes so you can avoid them:
1) Not understanding your plan: Many people, excited about their new job, ignore the employee handbook that explains benefits like the 401(k) plan. Take the time to understand what’s available to you. Meet with HR, ask questions, and make sure you know things like the maximum contribution limits and any matching funds your employer offers.
2) Ignoring your investments: Markets and personal situations change. It’s crucial to periodically check your investment allocations and rebalance if necessary. Don’t just set it and forget it. For instance, I once got burned by not diversifying and putting everything into a tech fund right before the dot-com bubble burst.
3) Not maximizing contributions: If you can, max out your IRA and 401(k). The contribution limits are there to guide you, but even if it’s a stretch, try to hit them. Early on, even when I wasn’t making much, I overlooked the importance of contributing as much as I could.
4) Trading too often: Trading frequently within your 401(k) can rack up fees and rarely outperforms the market consistently. Plus, it takes time away from your job where you could be earning promotions and raises.
5) Borrowing from your 401(k): This is a bad idea because it undermines the growth of your investments. If you withdraw, you face taxes and penalties. Try to keep that money invested and growing until retirement.
6) Stopping contributions after a job change: It’s easy to neglect your retirement plan when you change jobs, but try to keep up your contributions. Even if you leave the workforce, look into rolling over your 401(k) into an IRA or another tax-advantaged plan and continue contributing if possible.
7) Converting to a Roth IRA hastily: High earners should think twice before converting a 401(k) into a Roth IRA because of the immediate tax burden. Consider your current tax rate versus your expected rate in retirement before making a move.
8) Paying high fees: High fees can eat into your retirement savings. I didn’t realize how much I was paying until I used a tool to analyze the fees. Lower fees mean more of your money stays invested and grows over time.
If you’re not yet taking full advantage of your 401(k), start now. Make sure you’re contributing as much as you can, keeping an eye on fees, and managing your investments wisely. Your future self will thank you for the extra effort you put into safeguarding your retirement.
