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6 Common 401(k) Mistakes to Avoid header image

6 Common 401(k) Mistakes to Avoid

You have a 401(k) (or 403(b) or 457) and are saving for retirement — congratulations! You’ve taken the first step on a long journey to building your future. As you continue down the path, here are the top 401(k) mistakes to avoid as you grow your nest egg.

1. Leaving Money on the Table

Many workplaces offer matching retirement savings programs that reward employees for putting money away for the future. If you don’t take full advantage of these programs, however, you could be making one of the most common 401(k) contribution mistakes: not maximizing the company match. If your company matches up to 3%, for example, you should do everything you can to contribute that amount. Otherwise, you’re letting the company keep a portion of your overall compensation.

Another way people leave money on the table is changing jobs before they are fully vested in their company’s match. Some companies vest immediately, meaning you have access to those matching funds as soon as you join the company. However, many others have a vesting schedule (e.g., 20% after your first year, 40% after your second, and so on). When you leave before you’re fully vested, you can lose a significant amount of your company’s retirement match.

2. Paying Your Future Self Too Little

Retiring takes a significant amount of money. Oftentimes employees invest enough to get their match (hooray for avoiding the first mistake) but stop there. In most cases, maxing out your employer match isn’t enough to adequately prepare for retirement. Your goal should be closer to 10-20% of your paycheck. If that seems overwhelming, start gradually increasing the percentage you set aside. If you feel you can balance your living expenses and paying off any high-interest debt, consider putting your yearly raises into your 401(k).

3. Setting and Forgetting Your Investments

Target date funds are a common vehicle with many company-sponsored retirement plans. However, they may not be the best fit for you, as they tend to be associated with more fees and lean toward conservative investments that might not meet your growth goals.

No matter what you’re invested in, you should regularly review your portfolio and rebalance as necessary. This ensures that your investments align with your preferences and your goals. You should also review the fees listed on your annual disclosure statement; 1% is generally regarded as acceptable while higher fees restrict investment growth.

4. Accessing Your Money for Anything Other Than Retirement

401(k)s were created to be long-term savings vehicles for retirement. If you decide to withdraw funds from your account prior to retirement, you may be subject to harsh penalties — typically an additional 10% of anything you withdraw before age 59½. While you may be able to borrow against your 401(k) and repay that money over five years, you should use that as an absolute last resort. You will be required to pay back interest and fees, and you’ll also lose the growth you would have seen in your retirement account over that time.

5. Forgetting to Transfer Funds When You Change Jobs

Every year retirement funds are lost or abandoned when people leave their old employers. Don’t throw away the money you’ve worked hard to save! Work with your new employer to initiate a transfer to your new 401(k); don’t withdraw those funds personally, as that will generate fees and will negatively impact your long-term savings. If you’ve lost track of an old account, do what you can to find your old 401(k).

6. Living Without A Plan

Without a basic understanding of how much you’ll need, how will you know how much to save? Goals are crucial in keeping you focused and on track — so you can resist the temptation of a large purchase and instead keep saving. As you approach retirement, you should also have a withdrawal strategy that will ensure you have enough money to meet your needs for the rest of your life.

Your retirement needs are a priority at Farm Bureau. Connect with an agent to find the best option for your retirement savings or a financial advisor to create a holistic financial plan. The best future is one that you are prepared for — let’s start today. 

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Angie Dietz-Robinson
(319) 575-9105
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