5 Mistakes Regarding 401(k) That Might Cost You a Fortune

 

The 401(k) has become a staple way of saving in our economy, and a key component of your personal finance.  Nearly every company offers one and many also offer matching up to a certain percentage.  This means that you get free money from your employer when you contribute enough to your account.  Despite the overwhelming evidence that a 401(k) can be a key component to your retirement plans, many continue to make mistakes regarding their accounts.  The good news is that these mistakes are easily identifiable and fixable. 

1.  The most common mistake is not contributing at all.  Many people not only don’t make any contributions, but also don’t save enough to get the company match.  A recent study found that only 7% of active participants in a 401(k) program actually come within at least $500 of the plan maximum allowed.  The same survey showed that nearly 30% of active participants fail to contribute enough to get the company match.  This is the same thing as throwing away free money.  By declining this gift, your account will be worth thousands less than if your had contributed enough to earn a company match.  Fortunately, it is easy to correct this problem by being a little bit more thrifty and contributing more to your 401(k). 

2.   Another mistake is in owning too much of your own company stock.  Besides the risk of having too much money tied up in one particular stock, you also typically get smaller returns.  Studies show that portfolios with more than a fifth of their assets tied to company stocks show an average of 18% less wealth after 20 years.  This is when compared to portfolios holding less than 10% percent in company stock assuming all other things are equal. 

3.   Borrowing from your 401(k) should be a measure of last resort.  If you do have to go down this path, only use the money for something important such as medical bills or buying a home.  Never use the money for something like a car or vacation.  If you do take the money out, you will have to pay yourself back with interest or the money will be treated as a distribution and you’ll face a hefty tax bill.  Besides, when you take the money out you miss out on the growth that would have taken place.

4.   Another mistake is never adjusting the amount of risk you have in your 401(k) portfolio.  As you get closer to retirement age, it is important to reduce the amount of money you have in stocks.  Rather, you want to put the money is something less volatile.  The opposite is true if you are years away from retirement and can risk the ups and downs of the stock market.  Keep on top of how the money in your 401(k) is distributed and re-balance as needed. 

5.   Finally, don’t get emotional about your investment.  Keep in mind that investing in a 401(k) means you stick with it for the long haul.  Ups and downs are part of the investment cycle so even in a bad year; don’t yank all your money out.  Typically, it will still garner better returns than just sitting in a bank.  Never make short term decisions for a long term investment.

Credit

This is a guest post from Andrew Wang, who publishes International Travel Medical Insurance, Reward Credit Card