3 Worst 401(k) Mistakes – And How to Avoid Them

401k

I have some bad news. Planning for retirement is a lot harder today than it was for our parents. Pensions are a thing of the past. But you probably already knew that. Less than 13% of employees currently participate in a pension plan, and that number keeps going down.

But here’s the good news: the rise of 401(k)s and other retirement savings plans ultimately give you way more flexibility and control of your financial life, but only if you know what you’re doing…

This is referred to as a “defined contribution” plan, as opposed to the “defined benefit” pension plans of the past. “Defined contribution” is a fancy way of saying that you are able to contribute a certain amount to the plan, whereas “defined benefit” says that you will be guaranteed a certain amount of income in retirement.

What Is a 401(k)?

How does a 401(k) Work?

When you get hired at a new company, almost always one of the benefits is an offer to participate in their 401(k) program. When you enroll, you can select a certain percentage of your paycheck that goes straight into your 401(k) account (without being taxed!)

Mistakes to Avoid

Assuming you made $50,000 per year and your company matched 4% of your contributions, after 40 years and a 7% return that is over $400,000 you are leaving on the table by not taking advantage of the company match! I don’t know about you, but I could think of a lot of things to do with $400,000.

Mistake #1:  Not Getting the Company Match

If you only invested in a cash account per the contribution schedule above, you’d have about $220,000 at retirement, compared to the $940,000 you could have had if you invested in the market. If you’re too scared of the ups and downs of the market, consider putting more of your money into bonds.

Mistake #2: Leaving your Contributions in Cash

The secret comes down to fees. Actively managed funds have to pay all those geniuses who sit around and pick stocks all day. An index fund has the simplest (and cheapest) investing strategy – buy the stocks in the index.

Mistake #3:  Paying High Fee

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