For people in all income brackets, 401(k)s are among the most valuable types of retirement accounts. However, there are a few common mistakes that prevent people from making the most out of them. Learn to avoid these 401(k) mistakes.
5 Avoidable 401(k) Mistakes
1. Participating Late (or Not at All)
It’s generally recommended for anyone who has access to a 401(k) to enroll as soon as possible.
The longer an investor waits to enroll, the more they are impacted by an effect known as the “cost of waiting.” This means that each day presents an opportunity for investments to grow, so each day without money in a 401(k) is a missed opportunity.
2. Not Taking Full Advantage of Employer Matches
Employer matches in 401(k)s are some of the closest things to free money an investor can possibly capitalize on. It is highly recommended to take full advantage of employer matches. Neglecting to do so is one of the most detrimental 401(k) mistakes, since it can cause investors to potentially miss out on a huge chunk of retirement money.
3. Not Setting a Goal
Without specific goals, it will be difficult for an investor to adjust their 401(k) in a meaningful way. While the recommended amount of money to save in a 401(k) will certainly vary from person to person, it is imperative to establish concrete goals. A Certified Financial Planner™ professional can be extremely valuable here.
4. Reliance on Company Stock
Many companies offer their own stock as a 401(k) investment option. Allocating some contributions into company stock certainly has its advantages, but investing too much can potentially have an adverse effect.
The main reason for this is that investing too much in one stock makes an investor’s portfolio drastically less diversified. Imagine a situation where an investor allocates 90 percent of their 401(k) contributions into their own company’s stock, and then the company undergoes an event that causes its stock value to plummet. This investor has likely just lost a considerable sum of money.
5. Premature Borrowing
Although it’s possible for someone to take a loan from their 401(k), it is generally recommended not to do so. There are several reasons for this:
- Stunted growth. Money borrowed from a 401(k) is money that is no longer invested and growing.
- Interest payments. Loans taken from 401(k)s must be paid back, interest included. Repayment of the loan ends up costing more than the principle as a result.
- Lower contributions (or none at all). People who borrow from their 401(k) often end up contributing less during the time that they’re repaying the loan. In addition, some 401(k) plans have provisions that completely prevent people from contributing while they have an outstanding loan.
With the guidance of a Certified Financial Planner™ professional, it becomes much easier to avoid 401(k) mistakes such as the ones listed in this blog.