Don’t Make These 401(k) Mistakes

Named after Section 401(k) of the Internal Revenue Code, this powerful retirement vehicle was created in the early 1980s by Congress as an alternative to traditional defined benefit plans. Funded with pre-tax contributions, 401(k) plans help employees save while lowering their taxable income. Employee matching funds, when available, make this retirement planning option hard to beat. But there are some costly 401(k) mistakes you can also make. Make sure you’re protecting your financial future by avoiding these common missteps.

Not signing up. Starting early puts time on your side — time to ride out the occasional ups and downs of the stock market. Delaying enrollment in your plan can be a costly 401(k) mistake for participants of any age. Many employees are auto enrolled, but if you’re not one of them, stop by your benefits office and sign up. And ask what amount you have to contribute in order to receive the maximum company match, if available — investing at least that much should be your first goal.

Stopping when the market dips. By contributing a fixed amount of money at regular intervals, you’re dollar cost averaging, which allows you to purchase more shares when stock prices are lower and fewer when prices are higher. While many people become understandably jittery when the market dips, these dips can present valuable buying opportunities. Consistent investing over time is key to long-term success.

Borrowing against your 401(k). This type of loan can range from being merely an unfortunate necessity to a costly 401(k) mistake as it can not only trigger a hefty 10% penalty on funds withdrawn before age 59½, but can also exact a tremendous opportunity cost should the market dramatically appreciate while your funds are divested. Additionally, if you should default on your 401(k) loan when changing jobs or for any other reason, you can be significantly set behind on reaching your retirement goals. This is one reason it’s important to maintain an emergency fund of at least three months’ worth of expenses in a safe, accessible account such as a high-yield online FDIC insured savings account.

Not saving enough. Some employees start saving at the default contribution level, and never increase that amount. Instead of saving at higher levels, some participants save minimally — as low as 2% to 3% per year, which might not be enough to reach retirement goals. It’s a good idea to meet with your financial advisor at least once a year to review your contribution levels and see if you can raise them, even if it’s just by 1%.

Missing out on catch-up contributions. If you’re over age 50, you’re eligible for a catch-up contribution of up to $6,000 per year in 2019. These catch-up contributions can go a long way toward making up for any shortfalls in your retirement account. Speak to your financial advisor about your eligibility and if catch-up contributions make sense in your specific situation.

Passing up free advice. When you have access to free financial planning services through your employer, you should avail yourself of them. Financial planners can help you periodically review retirement goals and offer important advice in other areas including insurance, estate planning, and taxes — and help you avoid costly 401(k) mistakes. This can be one of the most valuable employee benefits you’re entitled to, so by all means take advantage of it.

Your NFP financial advisor is ready to assist you with your retirement planning goals. Call today to set up a complimentary consultation.

Source:

https://www.forbes.com/sites/johnwasik/2019/01/14/what-are-the-5-biggest-401k-blunders/#5bcf051276e8