How can I avoid the most common 401(k) mistakes and maximize my retirement savings?

3 min read

A 401(k) is a great way to save for retirement, but it also comes with some pitfalls that can hurt your long-term financial goals. Here are some of the most common 401(k) mistakes and how to avoid them.

  1. Not contributing enough: One of the most significant benefits of a 401(k) is the employer match, when your employer contributes a certain percentage of your salary to your account, up to a limit. This is free money that can boost your savings significantly. However, many people don't take full advantage of this opportunity and leave money on the table. To avoid this mistake, you should contribute at least enough to get the full match from your employer. For example, if your employer matches 50% of your contributions up to 6% of your salary, you should contribute at least 6% to get the full match.

  2. Not diversifying your investments: Another common mistake is putting all your eggs in one basket for your 401(k) investments. Many tend to invest too heavily in a single asset class, such as stocks or bonds. This can expose you to unnecessary risk and volatility, mainly if the market performs poorly. To avoid this mistake, diversify your portfolio across different asset classes, sectors, and geographies.

  3. Not rebalancing your portfolio: Even if you start with a well-diversified portfolio, your asset allocation can drift away from your original plan due to market fluctuations. For example, if stocks perform well and bonds perform poorly, your portfolio may become more stock-heavy than you intended. This can expose you to more risk than you're comfortable with or reduce your potential returns. To avoid this mistake, you should periodically rebalance your portfolio, adjusting your investments to your desired asset allocation.

  4. Cashing out or borrowing from your 401(k): Sometimes, life happens, and you may need extra cash for an emergency or a big purchase. However, tapping into your 401(k) before retirement is usually a bad idea that can cost you a lot in taxes and penalties. If you withdraw money from your 401(k) before age 59 1/2, you will have to pay income tax on the amount plus a 10% early withdrawal penalty. If you borrow money from your 401(k), you will have to pay interest on the loan and repay it within a certain period, usually five years. If you fail to do so, the loan will be treated as a withdrawal and subject to taxes and penalties. To avoid this mistake, you should only use your 401(k) as a last resort and try to find other funding sources for your short-term needs.

  5. Not reviewing or updating your plan: Finally, one of the most common mistakes is neglecting your 401(k) plan and forgetting about it until retirement. Your 401(k) is not a set-it-and-forget-it type of investment; it requires regular attention and maintenance to align with your changing needs and goals. To avoid this mistake, you should review your plan at least once a year and make any necessary adjustments based on your life events, such as getting married, having children, changing jobs, or nearing retirement. You should also regularly check your fees, performance, and beneficiary information and ensure they are current.

  6. Investing in high fees underperforming performing funds: Just as investments compound, fees also compound. It's essential to be vigilant about the expense ratio of the funds you invest in. A typical target-date fund has an expense ratio of 0.34%, which is relatively high for an already low-performing conservative fund. This mistake can cost you hundreds, sometimes even millions, of your retirement savings.

By avoiding these common 401(k) mistakes and following simple best practices, you can maximize your retirement savings and enjoy a comfortable and secure future. We help people like you make intelligent decisions about their finances. Check out our 401(k) Optimizer and find the best funds and practices to maximize your retirement savings.

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