401k plans offer a way for individuals to save money for retirement. The retirement account offers several benefits, but many individuals don't maximize them fully by making common blunders. Some of the mistakes made when investing in a 401k plan can result in having significantly less money during retirement than if the right decisions were made when contributing to the plan.
Neglecting to Participate
A big mistake when it comes to a 401k plan is that many employees neglect to participate. Some employees miss out on the chance to save money for retirement with pre-tax dollars by not sign up for an employer-sponsored 401k plan. Retirement accounts take advantage of compound interest, so it is important to start saving for retirement as early as possible.
Not Maximizing Full Employer Matching
Some employees do not contribute enough money to their 401k plans to take advantage of the full matching benefits offered by their employers. Many employers offer 100 percent matching for employees that contribute a certain amount to their accounts. Not contributing enough money and taking advantage of employer matching means you're missing out on free money.
Conservative investors sometimes find it difficult to invest in stocks, but investments with the most risks often yield the highest rewards. Some employees do not see much growth in their 401k accounts because their investment portfolios are too conservative. Many financial experts suggest having a portfolio that contains stocks and bonds. Younger investors can take a chance with riskier investments because of the time left before retirement. However, it is still important to make sound investment decisions.
Extremely Risky Portfolio
Similar to conservative portfolios, extremely risky investment portfolios are detrimental to your 401k account. When you portfolio is filled with risky investments, the event of a bear market will have a negative impact on your 401k account. If you plan to invest is financial instruments that are considered risky, it is important to research them thoroughly.
Lack of Diversification
Lack of diversification is potentially harmful to a 401k account. It is critical not to put all of your eggs in one basket, which includes not investing too heavily in your employer's stock. If your employer goes out of business, your 401k will suffer drastically. Diversifying your assets will give you a better chance of withstanding any negative conditions with your employer or the financial markets. Re-balancing your investment portfolio yearly will help you to stay diversified.
Borrowing Against Account
A common blunder many 401k holders make is taking out loans against their retirement accounts. It is understandable to take out a loan during emergency situations or important financial events, but you should have the ability to repay the loan. Failing to repay your loan can result in penalties. When you borrow against your account, the money that you've taken out does not have the ability to grow. Look for other alternatives before borrowing against your account.
Taking unapproved withdrawals from your account or cashing it out early will cause you to incur penalties and taxes. There is also a risk that your account will lose its tax-deferred status. Making early withdrawals from your account essentially means that you will have less money during retirement. Not only are you removing the principal, but also forfeiting the interest possibly earned if the money remained in your account.