Your 401(k) for your retirement is like a screw driver for an assembly. It will help a great deal, but you still have to put in the effort to use the tool properly. 401(k)s bring millions of people in the U.S. many steps closer to a comfortable retirement. But like everything else in life, 401(k)s don’t provide absolute retirement security. Here are six mistakes many people are making with their 401(k) plan.
Thinking a 401(k) is it. Again and again I hear others justify their outrageous spending as okay because they fund their 401(k)s. Just because you contribute to your 401(k) does not necessarily mean that you are going to have a comfortable retirement. Living below your means is still key and a simple fact that is all too easily forgotten.
Relying on auto pilot. Automatic deposits are a great way to save, but it presents problems when we just deploy the set and forget strategy. Even if your plan allows you to automatically rebalance your portfolio, there's a need to change your allocation based on your continually changing needs. For those who don't know how to change allocations by yourself, learn how by asking your colleagues for tips or the plan administrator for an introductory guide.
Ignoring alternative investments. Traditional IRAs, Roth IRAs, savings, and investment accounts are all investments that you should have if you want to enjoy your twilight years. Just because 401(k) plans have tax advantages doesn't mean that it's automatically the best place to put your money. The only way to be certain is to do a thorough comparison of the differences between a traditional IRA and a 401(k).
Paying high expense ratios. One of the reasons a 401(k) may not be the best place to put your money is that many plans have funds that charge unnecessarily high expense ratios. Just as personal finance 101 taught us, the higher the expenses, the less we keep for ourselves. It's just simple mathematics.
Forgetting that a 401(k) is for retirement. I shouldn't say forget, because most people probably know this. The problem is actually the temptation of that lump sum whenever there's a job change. Too many people will need to rely heavily on their 401(k) to fund their retirement, but then swiftly deplete their account whenever they change jobs, making their nest egg balance a big fat zero. The lure of now is always greater than the future, but 401(k) plans should be set up to allow for a comfortable future. Never forget that.
Failing to optimize tax breaks. This is more a missed opportunity than a mistake. Not enough people think about optimizing their entire investment portfolio as a whole. Retirement account assets grow tax free. Consider putting heavily taxed investments in a retirement account and leaving the tax efficient investments in taxable accounts.
401(k) plans are great for everyone who is able to participate. However, having one doesn't mean you are set for life. A comfortable retirement is still your responsibility.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.