6 Common 401(k) Mistakes to Avoid

Saving for retirement is important for everyone, and investing in a 401(k) (or a 403(b) or 457) is an important first step on the long journey to building your future. These plans are often part of your employer-provided benefits, and they’re an easy way to make sure that you’re contributing to the funds you’ll need some day.

These accounts are powerful if you use them the right way. However, it can be easy to make mistakes, such as when you change jobs. You may also have questions, like when you can withdraw from your 401(k) or how much you should be contributing.  

Whether you’re trying to avoid 401(k) mistakes or just continuing down your path, here are a few of the top 401(k) mistakes to avoid and strategies to employ as you grow your nest egg. And if you want professional help when planning your retirement, speak to Farm Bureau.

Mistake #1: Leaving Money on the Table

At many workplaces, you get rewarded for putting money away for the future in the form of matching retirement savings programs. When you contribute to your employer-sponsored plan, your employer matches some portion of that contribution. If you don’t take full advantage of these programs, 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 every paycheck. Otherwise, you may be giving up a portion of the compensation available to you. 

Another way people leave money on the table is changing jobs before they are fully vested in their company’s match. If you leave before you’re fully vested in the match, you don’t get to take that money with you. 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 (for instance, 20% after your first year, 40% after your second and so on).  When you stay until you’re fully vested, you have maximized the matching funds and won’t leave money on the table.

Mistake #2: Paying Your Future Self Too Little

Retiring takes a significant amount of money. Often, employees invest enough to get their matching funds from their employer but stop their investment there. In most cases, maxing out your employer match isn’t enough to adequately prepare for retirement.

Your goal should be to invest closer to 15% of your paycheck, as long as you’re starting around 25. If you start saving for retirement later, you may have to contribute a higher percentage to ensure you have the funds to retire. Does that seem overwhelming? Start gradually increasing the percentage you set aside. If you feel you can balance your living expenses and pay off any high-interest debt, consider putting your yearly raises into your 401(k). As the interest compounds, that money will grow, and you’ll thank yourself later.

Mistake #3: Setting and Forgetting Your Investments

It’s easy to just set up your 401(k) investments and then assume your account will grow forever without involvement from you. Target date funds are a common investment vehicle in many company-sponsored retirement plans. However, it’s important to verify that the target date funds are a good fit for you. They tend to be associated with more fees and take a “one-size-fits-all” approach that may not align with your risk tolerance or 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 the average fee and generally regarded as acceptable, while fees greater than 2% may restrict investment growth.

Mistake #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, you should use that as an absolute last resort. You will be required to pay back interest and fees, and you may lose the growth you would have seen in your retirement account over that time. Do everything you can to leave that money in your retirement account.

Mistake #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) or another financial institution to transfer those savings to a different type of retirement savings vehicle. Don’t withdraw those funds personally, as that can generate fees and 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).

Mistake #6: Living Without a Plan

Without a basic understanding of how much you’ll need in retirement to maintain your standard of living, 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.

Be Ready for Retirement

Your retirement needs are a priority at Farm Bureau. Reach out to connect with an agent to find the best option for your retirement savings or a financial advisor to create a holistic financial plan.