There seems to be a national holiday for just about anything these days — September brings National Cherry Popover Day, Make a Hat Day and much to our excitement, National 401(k) Day! While you may not be putting up balloons and streamers to celebrate on September 6, it’s a great reminder to check in on your savings and ensure you’re using your employer-sponsored investment vehicle to its full potential.
Unfortunately, many people sign up for their company’s 401(k) plan when they start a new job and never give it a second thought. Ignoring your account is just one of many mistakes you might be making. To help you avoid other common missteps, we’ve compiled a list of top 401(k) mistakes to avoid.
Mistake #1: Not Saving Enough to Get Your Employer Match
Many companies offer an employer match to encourage their employees to save more for retirement, such as matching dollar-for-dollar contributions of up to 3% of your annual salary. Unfortunately, studies have found a lot of people fail to take advantage of that free money being offered: One in four marriedcouples do not save enough to get their full employer match, missing out on hundreds of dollars in extra savings!
At a minimum, we recommend saving at least enough to get the full match being offered to you. From there, you can set up auto increases to your contributions, such as saving an additional 1% every year. Setting up auto increases is a powerful way to save more with little effort. You probably won’t even notice the extra 1% coming out of your paycheck each year!
If you want to push yourself to save even more, here are some general guidelines around how much you should be saving in your 401(k):
- Contribute 10% of your annual salary by age 30
- Contribute 20% of your annual salary by age 40
- Max out your contributions by age 50
Mistake #2: Leaving an Old 401(k) Behind
If you get a new job, do not forget to make a plan for the 401(k) you had with your previous employer. There are several money moves you can make to ensure your investments don’t get left behind, so it’s important to analyze your situation to determine the best step forward.
In some cases, it might make sense to keep your 401(k) with the previous employer, so long as you remember to monitor it and access it when you are ready to retire. For others, rolling the funds over into your new 401(k) plan might work best. Alternatively, you may consider rolling the money over into an IRA. You’ll pay taxes on those converted dollars at your current tax rate, but the money will grow tax-free and can be used tax-free in retirement. No matter which path you choose, the important thing is not to forget about the nest egg you started, no matter how big or small it may be.
Mistake #3: Withdrawing From Your 401(k) Early
When changing jobs, some people choose to cash out their 401(k), which can cost you big time in taxes and early withdrawal fees. Withdrawing any amount from your 401(k) account before age 59 ½ will result in a 10% penalty on top of federal and state income tax, which means you could end up paying 30% or more in taxes! Do you want to lose out on that much money?
Withdrawing early from your 401(k) can also stunt your growth. Investment accounts grow with the power of compounding interest — in general, the more you save, the quicker your money can grow. It’s like a snowball rolling down a hill! If you take out a large chunk of money, you may have a hard time making up the growth your money could have earned had you kept it invested.
Mistake #4: Not Understanding Your Fees & Investment Options
It’s important to pay close attention to what you’re paying in fees on all of your retirement accounts. Plan fees can vary, so know where to find all the fees associated with your 401(k) plan. At Zephyrus, we have a tool that analyzes all fees and benefits that each individual plan has to ensure we’re asking a fair rate. When we include funds in our platform, we offer both a cheaper index option and an actively managed option, which tends to have higher returns to offset the higher fees.
Consider all of your options when it comes to investments, as well. A good financial advisor will sit down with you and check the investment choices inside your 401(k) plan to ensure you’re diversified and maximizing your potential. If your partner or spouse also has a 401(k) plan, it’s important to consider how your investments coincide. There’s no reason to double up on the same investment plan; instead, you may want to increase your diversity and take advantage of a particular investment option that your partner does not have access to.
Mistake #5: Only Investing with a 401(k)
While your employer-sponsored 401(k) can be a powerful tool to help you save for retirement, it shouldn’t be the only investment vehicle you utilize. It’s important to diversify your savings to ensure all of your money is not tied up in taxable accounts. Opening a Roth IRA might be beneficial because it allows you to grow your money tax-free and use your funds tax-free in retirement. You can also open up a traditional IRA or consider using a Roth 401(k) if your company offers one. The goal is to avoid putting all your eggs in one basket!
A 401(k) plan can be a powerful investment tool, so long as you are utilizing it to its full potential. We know that financial decisions can be confusing and overwhelming at times, which is why we are so passionate about sharing our knowledge and expertise. If you have questions about your 401(k) account, reach out to see how we can help.