401(k) Mistakes to Avoid

October 13, 2020

A 401(k) plan offers the opportunity to create wealth and secure a comfortable lifestyle after retirement. Research conducted by the Center for Retirement Research at Boston College found that the average 60-year-old had less than $100,000 in retirement savings in 2019 when they should have been at $360,000. In this article, we will discuss some 401(k) mistakes that you should avoid.

 

Failing to Maximize the Employer Match

Most companies that offer a 401(k) plan also offer a 401(k) match. Anqi Angie Chen from Boston College shared that more than 30% of workers contribute below the matching opportunity offered by their employer. Increasing your contributions to maximize your employer’s match may seem a bit frightful. You can decide to increase your contributions annually until the 401(k) match gets to the maximum.

 

Inconsistency in Contributions

Missing a few contributions can have a significant impact on your retirement savings in the long run. When you do not contribute regularly, you will miss out on the opportunity of capitalizing on compound interest. Missing contributions of $57,000 can result in an opportunity cost of $100,000. It is important to make saving for your retirement a habit. If you are unemployed, try to put some money into an individual retirement account even if you are only able to contribute $10 or $20.

 

Withdrawing from Your 401(k) When It is Not Absolutely Necessary

Generally speaking, withdrawing from your 401(k) plan before you get to 59 ½ years old will result in you having to pay taxes and an early withdrawal penalty. This penalty is 10% of the sum withdrawn. Under the recently passed CARES Act that is geared towards helping people to withstand the financial storm that is accompanying the pandemic, you can withdraw without facing this penalty and taxes if you do so within their criteria. While this is in place, it does not mean that everybody should do it. If you have other options, capitalize on those.

 

Failure to Consistently Increase Contributions

Many fail to consistently increase their contributions. This is an issue because if you do not get your contributions to a certain level, you may not have enough to maintain your lifestyle after retirement. The recommended contribution is 15% to 20% of your income. Bear in mind that this also includes the amount that your employer will contribute to match your contributions. A simple strategy to get to the suggested contributions is to increase your contributions by 1% each year.

 

Conclusion

The report from the Center for Retirement Research at Boston College tells a story. While we do not know the individual cases that make up the average figures, we do know that many who are behind in their savings got to that point because of some of these mistakes. Keep these in mind and do all in your power to avoid slipping up. By diligently managing your retirement savings account you will secure a better life for yourself after retirement.

Rahul Iyer