YOUR LIFE
Your Shrinking Nest Egg:
Costly 401(k) Mistakes Can Hurt You Now...And Later
Mistake #1: The Big One
Okay, we hope you're not making the biggest mistake of all - not participating in your company's 401(k) plan. Taking advantage of this benefit is the easiest way to save for your retirement. After all, contributions you make generally reduce your taxable income, and they grow tax deferred until retirement. Plus - and this is even better news - many employers "match" a portion of your savings, meaning you'll have even more set aside for retirement - but, you have to participate in your company's 401(k) plan to reap this employer match benefit and enjoy this basically free money.
Mistake #2: How Much Is Enough?Not contributing enough is another common mistake made by 401(k) participants. You should generally contribute enough to at least get the full match from your employer, but that may not be enough to sock away for those golden years. For 2008, you can contribute up to $15,500 and if you're age 50 and over, you can contribute up to an additional $5,000, for a total of $20,500.
Unless you set a retirement goal and know how much you should be saving to reach that goal, you'll never know how you're doing. Even though retirement may seem a distant dream, the sooner you start saving, the easier it is to reach your goal. If you're close to retirement, it's time to get serious.
Mistake #3: Ignore, Ignore, IgnoreEspecially in today's downward economy, you have to be diligent in reviewing your plan on a regular basis if you want to maximize your investments and make the most of your contributions.
Many 401(k) participants fall into the "I don't know what to do, so I won't do anything at all" category. This can be the equivalent of the death sentence for your retirement plan. Ask your Human Resources representative about financial-education resources or access to investment advisors which may be available to associates.
Mistake #4: Too Much Company StockThe majority of today's 401(k) plans offer a wide variety of investment options, so investing an unbalanced amount of your portfolio in your own company's stock may not be the wisest allocation of your investment dollars. Remember Enron, and more recently, Bear Stearns? Ouch.
The best rule of thumb for your 401(k) plan is to diversify your portfolio, keeping in mind your risk tolerance which can change as you move from your 20s to your 30s, 40s, and on. Your retirement investing is a long-term commitment; check with a financial advisor to find an asset allocation that's right for your stage of life.
Mistake #5: Cashing Out Your 401(k)This might be the second biggest mistake of all and should be a last resort rather than a source of funds.
Withdraw money from your account before you're 59 1/2 and it's subject to taxes, and you could also end up paying a hefty 10 percent early withdrawal penalty. (Even though your plan may allow a hardship withdrawal, tax and penalty provisions still apply.
Leave your money in the 401(k) plan as long as possible, permitting maximum growth. If you change jobs, you typically have several options for your retirement plan:
- Roll your 401(k) balance into a retirement plan at your new company
- Roll your 401(k) balance into an IRA, which traditionally gives you a broader range of investments than employer retirement plans
- Leave the money in your former employer's 401(k) plan (unless your balance is under $5,000)