You’ll often hear that Social Security won’t provide you with enough income to maintain a comfortable lifestyle in retirement, and that’s true. Those benefits will only replace about 40% of your pre-retirement income if you earn an average wage, and most seniors need about twice that much money to live the lives they want.
That’s where your personal savings come in. And if you have access to a 401(k) plan, you have a prime opportunity to sock away a decent sum of money for your senior self.
But if you mismanage your 401(k), you could end up sorely lacking in retirement income. And if you’re eager to avoid that fate, you’ll need to steer clear of the following blunders.
1. Not saving at a young age
It’s easy to let 401(k) contributions fall by the wayside at a time when you may be more focused on building near-term savings, paying off debt, and navigating young adulthood. But when it comes to growing long-term wealth, time is your most powerful tool. And by not funding a 401(k) when you’re young, you could end up missing out on years of growth in that account.
Behind on retirement savings? Over 50? Make catch-up contributions to your IRA, 401(k).
2. Not contributing enough to snag your full employer match
Many companies that sponsor 401(k)s also match worker contributions to varying degrees. If you don’t contribute enough to claim your company match in full, you’ll end up leaving free money on the table – and risk winding up short down the line. As such, find out what your maximum match entails – and do what you can to collect it.
Don’t miss out on free money: 3 reasons to contribute to your company’s retirement plan
3. Choosing funds with high fees attached
Some people invest their 401(k)s in mutual funds. That’s not automatically a bad idea. Some mutual funds have a strong performance history and could lead to solid returns on your money.
But mutual funds are also notorious for charging high fees, so you’ll need to be careful when going heavy on them, since those fees can eat away at your returns. You may, at the very least, want to split your 401(k) dollars between mutual funds and index funds, which are passively managed and charge much lower fees.
Ask yourself: How much do you know about the fees you’re paying on your 401(k)?
4. Choosing funds that are too conservative
The whole point of investing your 401(k) is to allow your money to grow. But if you choose the wrong funds, you may not be happy with the rate of growth in your retirement plan.
Target-date funds have long been a popular option for 401(k) savers, and many employer plans default contributions into target-date funds off the bat. But in addition to higher fees, target-date funds are notorious for investing savers’ money too conservatively. And that could lead to an income shortfall down the line.
Delaying Social Security? Here’s how long the average retiree takes to break even
5. Passing on a Roth
These days, an increasing number of 401(k)s offer a Roth savings feature. But if you’re not taking advantage of it, you may be missing out. The beauty of a Roth 401(k) is that the withdrawals you take in retirement will be yours to enjoy tax-free. At a time when money may be tighter, that’s an important thing.
Saving for retirement in a 401(k) is one of the smartest decisions you can make. But take things to the next level by investing in as savvy a manner as possible – and avoiding the mistakes above.
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