Tuesday, June 24, 2014
Many people have high hopes when they first join their company’s 401(k) plan. However, merely joining the plan and contributing to it regularly are not enough to ensure a secure retirement. There are many pitfalls 401(k) investors can fall into. Here are some mistakes to look out for:
- Cashing out early. Too often workers start an account and then cash out when they leave their employer after only a few years. Many workers who cash out are younger workers with smaller balances. The problem is that cashing out small 401(k)s can have a significant impact on future retirement savings. Rather than cashing out, transfer your 401(k) into your new employer’s plan. By doing this, you can continue to invest and grow your retirement savings.
- Saving too little. Many employers provide a 401(k) matching plan, with contributions typically up to six percent of pay. Yet, even saving six percent in your 401(k) is not sufficient to build adequate retirement savings for most workers. Most people need to contribute at least ten percent of their gross income.
- Thinking bonds are a good investment. The returns of bond funds have not been as good as stock funds in the last year. Many people invest in bonds to reduce risk and lock in more stable returns. But if interest rates continue to rise, bond fund returns could suffer. If your employer’s 401(k) plan offers a stable value fund, consider using it in place of a bond fund. These funds are usually managed by a bank or insurance company that pays a stated interest rate for a set period.
- Failing to make catch-up contributions. Workers age 50 and over in 2014 can contribute an additional $5,500 for a total contribution of up to $23,000 each year to their 401(k) plan accounts. If you change jobs and are automatically enrolled into your new employer’s plan, additional catch-up contributions will not be activated automatically, you must activate them in your new employer’s plan.
See Ray Martin, Biggest 401(k) Mistakes and How to Avoid Them, CBS News, June 23, 2014.