If you work for a company that offers a 401k plan, you have the opportunity to save an incredible amount of money for retirement.
But the odds are…you won’t.
It’s way more likely that you’ll blow your chances at a life of luxury by making one or more of these common 401k mistakes:
1. You won’t participate, or you’ll wait until it’s too late. When you’re just starting out retirement seems so far away. But it sneaks up on you faster than you can imagine. If you don’t start contributing to your 401k as early as you can you’ll be missing out on some serious opportunities for growth.
2. You won’t contribute anywhere near enough. Most people grossly underestimate how much money they’ll need in retirement. They don’t save anywhere near enough to live comfortably in their golden years.
Save as much as you can afford. And then save a little more. At least save enough to take full advantage of your company’s matching contributions.
3. You won’t diversify your assets. Diversifying simply means not keeping all your eggs in one basket. Remember those poor folks at Enron who invested their entire retirement account in company stock? Think they’d like to go back and diversify their portfolios a bit?
4. You’ll treat your 401k like an ATM. Borrowing from your 401k to pay off credit card debt may seem like a good idea. After all, the interest you pay on a 401k loan goes right back into your account. But if the market surges forward you’ll be left in the dust.
Unless you’re suffering a severe financial hardship, resist the temptation of borrowing from 401k plans.
5. You’ll cash out early. It’s tempting to simply cash out your 401k when you switch jobs. But the taxman will be the only one smiling. Not only will your distribution be considered taxable income, but you’ll get slapped with a 10% penalty tax if you’re under age 59 1/2.
401k plans are far from perfect but in this day and age they’re your best bet at saving enough money to retire comfortable. Use them to your advantage and don’t just flush your savings away.
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{ 8 comments… read them below or add one }
Yes I love this topic. After having a really long discussion with a few people at my work about this, I decided to create a four part series about what you need to invest in your 401(k).
Excellent points, I really think #1,2 make up the majority of problems people end up facing. I’m working on #1 with a couple people right now!
.-= myfinancialobjectives´s last blog ..The Ultimate Motivator: Compounding Interest =-.
When you’re young it’s so easy to put off retirement savings because it feels like you have 100 years to worry about it. But starting early is key so your money has more time to grow.
It’s amazing to me how people raid their 401(k)s, not realizing the ramifications of their actions. Maybe that money shouldn’t be so accessible…
.-= RainyDaySaver´s last blog ..Identity Theft: Shredders, Unite =-.
Hey Nicole, thanks for stopping by and commenting. I agree that far too many people raid their 401ks and I’m afraid they’ll end up regretting it come retirement time.
PS – I like your blog’s new look!
My husband’s company match goes in once a year as a single transaction based on his previous year contribution. Unless you set it up differently it automatically gets allocated to a money market account. While I might have been OK with that in 2007-2008 it’s really too much for us to have sitting out of the market. I’m not a risky investor by any means but 50% of the account value in a money market fund is not the right allocation for us. Great pointers.
.-= Stay at Home Mom CFO´s last blog ..Don’t Count Your Money Until it’s “There” =-.
You’re right, if you don’t elect the funds you want to invest in then the company will default you into the safest option which is usually a money market fund. But in most circumstances, that’s not the best option…at least not for your entire balance.
I prefer when the company matches on each payroll instead of once a year. I think it’s a better motivator to keep saving when you see the company kicking in a little each pay period.
Thanks for stopping by!
I like your list. What drives me nut’s is people keeping a gob of their money in company stock. You work for the company, they pay your salary, pay your insurance, maybe even a cell phone and company car. Then you want to lose your 401K too if the company goes belly up. You think people would learn after Enron and GM.
.-= Daddy Paul´s last blog ..The American Opportunity Tax Credit =-.
People are short sighted, they seem to see only till the tip of their nose. When they get the envelope with the 401K they feel as if they won some lottery and the money is there to be cashed out.
I am 38 years old, retirement was once beyond the dark hills, but know with 3 children time is moving fast-forward.. I take the second advise dearly – Save as much as you can now othewise you will find yourself eating soup and biscuits when you are 65+.
Very important post.
Dekel
.-= Dekel @ no money down home loans´s last blog ..Protect yourself from Mortgage Foreclosure Scams =-.
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