Avoid The Most Common 401(k) Mistakes

Having a retirement income to rely on is a must for every employee who is expecting a comfortable and happy retirement future. 401(k) Plans may offer most employees with the benefit of retiring with money or funds that can be used to enjoy the fruits of many, many years of labor. For all those people contemplating on starting a 401(k) plan to prepare for the eventual retirement years, here are the common mistakes that they should try to avoid.

A grave mistake that most employees make is not even participating in their company’s 401(k) Plan, with reasons ranging from not wasting their hard earned money for contributions to thinking that they have a need for it at present. But one would be crazy not to take advantage of having a 401(k) Plan.

The benefits are there- free money through employer matching contributions, tax breaks as well as a very convenient way of building a retirement income. It is always important to inquire about your company’s 401(k) program and sign up for it to enjoy the benefits that it offers.

Another mistake that most people make with their 401(k) plans is by not contributing enough. For others, it might be because they only set aside the minimal amount to contribute for their plan. But bear in mind that the bigger the amount that you save and put into your 401(k) plan, the bigger interest that it can earn and the better the investments will be able to perform.

But there is another reason why employees should contribute more than just the minimum amount on their 401(k) plans. Contributions to the plan are usually matched by the employer. Employees should contribute a bigger amount to take advantage of the maximum matching contribution of the employer. This can be considered as "free money" that you will be adding into your nest egg.

Still another mistake that most 401(k) plan holders make is that they are not trying to invest their 401(k) money for growth. Conservatively investing such funds in fail-safe but moderately performing investments can have an impact on the amount that an employee can end up with come retirement time. A study showed that a few employees take the advantage of investing in stocks to improve their fund performance.

Many people just do not want to take such a risk. But if employees up their risk tolerance a bit by investing in stocks while still in their 20’s, it can have a very big impact on the amount that they can eventually end up with upon retirement. The best way to go about this is to consult a fund professional to see what effect will increasing one’s risk tolerance can have on the growth of his or her 401(k) plan.

Another big mistake that most 401(k) plan holders make is cashing out their plans, especially when they change jobs. People will have to deal with penalty fees in case you plan to cash out your 401(k) money prematurely. Early withdrawals are subject to a 10 percent penalty along with the potential loss of growth if your money is not rolled over immediately to another fund.

The best way that an employee can do with his or her 401(k) plan in case of a job change is to roll over the plan to the new employer’s 401(k) or put it into an IRA. The 401(k) can also remain with your previous employer’s plan but you would need to sometimes pay a fee for its maintenance.

 

Posted by Ardent Editor on Sep 26 2007 in Retirement 101

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