How Not To Invest in a 401k

Photo of author

By Jacob Maslow

Investing in a 401K plan isn’t as easy as it once was, and it’s all too easy to make poor decisions about your portfolio allocations or make mistakes with your investing strategy.

Are you making any of these 401(k) mistakes?

Not Taking Advantage of Employer Contribution

Does your employer match your 401(k) contribution? If so, make sure that you’re contributing enough to qualify for a 100% contribution.

Say that your employer will match 100% of your contribution up to 5% of your income. If your income is $50,000 a year, 5% of that would be $2,500. That equates to about $208 a month. If you don’t contribute enough each month to maximize matching contributions, you would essentially be giving up $2,500 a year in free money.

It’s important to remember that you won’t be paying the complete $208 a month because any money that you contribute to a traditional 401(k) will automatically reduce your taxable income.

Not Saving At the Recommended Contribution Rate

Many workers choose the default contribution level that their employer selects, typically 2 to 3%. However, financial advisors recommend a contribution rate of 10 to 15%.

Households with an income of between $50,000 and $100,000 a year should aim to save between 12% and 15% of their income. Those who earn less than $50,000 a year should seek to save between 9% and 12%.

Not Understanding Your Investment Options

Do you know what your investment options are? Unfortunately, one survey found that one-third of Americans who are currently contributing to a retirement plan do not understand the retirement options.

It’s impossible to properly manage your retirement portfolio if you don’t know your options and their investment potential.

Cashing Out When You Change Jobs

Far too many people mistake cashing out their 401(k) when they change jobs. Unless your 60th birthday is right around the corner, you will have to pay taxes immediately at your current rate plus a 10% penalty for cashing out. Despite the stiff costs, nearly 60% of workers still take a lump sum when they change jobs. A mere 26% decide to take the best option, which is rolling it into an IRA to continue to build and manage their retirement portfolio.

Images Courtesy of DepositPhotos