3 401(k) Mistakes To Avoid
By: Selena Maranjian - June 04, 2018
A powerful tool to help us is the 401(k) account. Just be sure to use it effectively.
Here are three dumb 401(k) moves to avoid.
Dumb 401(k) move No. 1: Not participating or under-participating
One of the worst things you can do with a 401(k) account is not use it -- or underuse it. There are more than 600,000 defined contribution plans such as 401(k)s in existence, with more than 70 million people participating in them. As of late 2016, there was about $7 trillion in 401(k) plans.
That sure seems like a lot of money, but most accounts are far from able to support anyone in retirement. For example, the average 401(k) account balance in Fidelity Investments-managed plans hit a record average of $92,500 as of the end of 2016. Indeed, income from 401(k) accounts has been estimated to represent about 25% to 30% of overall retirement income.
Thus, it's best to be socking away as much as you can for retirement, whether in IRAs, 401(k) accounts, or elsewhere.
One big plus for 401(k) plans is that they have much more generous contribution limits than IRAs (which only accept up to $6,500 in 2017). For 2017, you can contribute up to a whopping $18,000 to a 401(k) account, plus another $6,000 for those 50 or older, for a grand total of $24,000.
Maybe you can't immediately sock away $18,000 or $24,000 in your 401(k) each year, but whatever level you start at, aim to increase it regularly. Contributing 10% of your earnings? Try to make it 11% next year.
If you're not contributing the maximum to your account, be sure to at least contribute enough to grab all available matching funds from your employer. As an example, a common match is a dollar-for-dollar one up to 3% of your earnings. If you earn $75,000 and contribute 3%, or $2,250, to your account, you would get another $2,250 from your employer -- and that's free, guaranteed money.
Dumb 401(k) move No. 2: Investing less effectively than you could
The next dumb thing you can do with your 401(k) is to invest in suboptimal ways in it. For example, a 401(k) plan will typically feature default investment choices, and they tend to be conservative ones that won't serve you well if you're young -- and they may not be great if you're older, either. Make sure that you decide how your 401(k) money will be invested. Don't just leave your account plowing your contributions into conservative default investments.
Where should you put your money? Well, it's hard to beat inexpensive, broad-market index funds, such as ones based on the S&P 500 or the total U.S. or world stock market. They will likely outperform most managed stock mutual funds. There are bond index funds, too.
Here are some other tips:
Don't succumb to emotions. If the market crashes and the value of your 401(k) account shrinks, don't panic and stop contributing to it. That's actually an excellent time to contribute more, as stock prices for good companies will be low -- as if on sale. Similarly, don't get caught up in greed, either, chasing after riskier funds that have had a good year. Be patient and you can accumulate a lot of wealth over time.
It's smart to know what kinds of fees you're being charged in your 401(k). You can compare your employer's 401(k) with other companies' at BrightScope.com. If your fees seem steep, let your company know.
Increasingly, many employers are offering the option of a Roth 401(k) account, which accepts only taxed, not pre-tax, contributions. Give it serious consideration, as it offers the chance to withdraw money from your account in retirement tax-free.
Dumb 401(k) move No. 3: Interfering with your 401(k)'s growth
Finally, don't interfere with your 401(k) account's growth. Many people cash out their 401(k) accounts when they leave a job. That's a terrible thing to do because it robs your future of retirement dollars that will likely be needed. If you withdraw just $20,000 that might have remained invested for 20 years, averaging 8% annual growth, you miss out on more than $90,000 in future funds.
When you leave a job, you can do well to rollover funds in your 401(k) into an IRA, where fees might be lower and investment options broader. Read up on the rules, though, lest you end up facing a fine for doing it wrong.
Another option many have when closing out a 401(k) account is to convert that money into an annuity that will pay regular sums monthly in retirement. If the annuity is from a highly rated insurer, it's like buying almost-guaranteed income that can help you sleep better in your golden years. Just be sure it's a fixed annuity and not a variable or indexed one, as those are more problematic.
Don't borrow money from your 401(k), either, if you can in any way avoid it. Borrowing means removing dollars that could be working and growing for you -- and that may never be repaid if you run into more trouble. (Not repaying a 401(k) loan can result in penalties and taxes, too.)
The last mistake to avoid is not designating one or more beneficiaries. Fail to do so, and the money may go to a party specified by a state formula and not to whom you want. Better still, designate your account as POD or TOD -- payable or transferable on death -- and it will get to your beneficiaries more swiftly, generally avoiding probate.
Article Source: Money.cnn
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