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8 COSTLY 401K MISTAKES YOU MIGHT BE MAKING…AND HOW TO FIX THEM FAST!

By John Persinos • October 28, 2024 • Stocks to Watch

Printable PDF

Editor’s Note: Here’s a reality check: your 401k could be the most powerful tool
in your retirement arsenal, or it could be a financial landmine waiting to blow
up your golden years.

Sure, employer matches and tax breaks sound great, but only if you know how to
play the game right. Many people, however, are unintentionally sabotaging their
future financial security.

Let’s dive into the common 401k blunders that could cost you big…and how to set
things right before it’s too late.

--------------------------------------------------------------------------------

 1. You’re Not Contributing Enough
    

One of the biggest mistakes people make with their 401k is not contributing
enough. A corollary to this mistake is starting too late (see mistake number
eight).

Your 401k is a powerful tool for building a secure retirement, but it only works
if you’re using it wisely.

The Fix: Aim to increase your contributions each year, especially if you receive
a raise or bonus. Initiate a percentage that feels manageable, and gradually
increase it over time. Many 401k plans offer an option to automatically increase
contributions annually. If it’s available, I strongly suggest you use it.

Starting to save for retirement in your 20s can make a significant difference,
setting you up for a more secure financial future. If possible, aim to save the
equivalent of your annual salary by age 30, letting compounding work its magic
from an early start.

In your 30s, try to grow that balance to three times your yearly income by 40;
by your 50th birthday, work towards having six times your salary saved. As you
enter your 60s, aim for around eight times your income. These milestones can
help keep you on track for a comfortable retirement.

Many people, however, struggle to meet these targets, so it’s vital to regularly
monitor your savings and look for opportunities to increase your contributions.
Consistent contributions and regular reviews of your retirement portfolio will
make a powerful impact over time.

As retirement draws closer, consider rebalancing your investments to ensure they
align with your evolving goals and risk tolerance. Starting early, saving
steadily, and adjusting when necessary can help you reach retirement with
confidence.

 2. You’re Ignoring Asset Allocation

Asset allocation, i.e. the balance of stocks, bonds, and other investments in
your portfolio, is essential for managing risk and returns. A common mistake is
either being too conservative (especially among younger investors) or too
aggressive (often among older investors approaching retirement).

The Fix: Revisit your allocation based on your age, risk tolerance, and
retirement goals. Generally, younger investors should have more exposure to
stocks for growth, while those closer to retirement might want more bonds for
stability. Many 401k plans offer target-date funds, which automatically adjust
asset allocation as you approach retirement.

 3. You’re Paying High Fees

Investment fees can take a significant bite out of your retirement savings,
especially if you’re not paying attention to them. High-cost funds eat into your
returns, and over time, even a 1% fee difference can have a major impact on your
final balance.

The Fix: Look at the expense ratios of your 401k investments. Many plans offer
low-cost index funds that track major market indexes with minimal fees. If your
plan has limited options, consider discussing it with your employer or HR team
to see if they can add lower-cost options.

 4. You’re Borrowing from Your 401k

Many 401k plans allow you to borrow against your savings, but it’s generally not
advisable unless you’re in a true financial emergency. When you take a loan, you
lose the power of compounding interest on the money you’ve borrowed, which can
dramatically reduce your retirement savings.

The Fix: Try to create an emergency fund outside of your 401k to avoid tapping
into your retirement savings when unexpected expenses arise. If you do need to
take a loan, have a clear plan for paying it back as quickly as possible.

 5. You’re Not Rebalancing Regularly

Market fluctuations can cause your portfolio’s asset allocation to drift over
time. For instance, if stocks perform well, you might end up with a higher stock
allocation than you initially planned, which could expose you to more risk than
intended.

The Fix: Make it a habit to rebalance your 401k at least once a year. This can
be done by shifting funds from overperforming assets (like stocks after a good
year) to underperforming assets (such as bonds). Some 401k plans even offer
automatic rebalancing options.

 6. You’re Cashing Out When You Change Jobs

When changing jobs, many people make the mistake of cashing out their 401k
balance. Cashing out incurs income tax and potentially a 10% early withdrawal
penalty if you’re under 59½. This move can be devastating to your long-term
retirement savings.

The Fix: Instead of cashing out, consider rolling over your 401k into an
Individual Retirement Account (IRA) or transferring it to your new employer’s
401k plan if they allow it. This keeps your retirement savings growing
tax-deferred.

 7. You’re Not Taking Advantage of Employer Matching Contributions

Not all employers offer matching contributions, but if yours does, it’s
essential to take full advantage. Employer matching is essentially free money,
and by not maximizing it, you’re leaving money on the table.

The Fix: At a minimum, contribute enough to receive the full employer match. If
you’re unsure of the matching policy, check with your HR department. Remember,
not taking full advantage of a match is like declining a portion of your salary.

 8. You’re Waiting Too Long to Start

One of the most damaging mistakes people make is waiting too long to start
contributing to their 401k. This can happen because people are focusing on
paying off student loans, credit card debt, or other financial priorities.
However, the sooner you start saving, the more time compound interest has to
work in your favor.

While retirement may seem far off, the earlier you start saving, the more time
your money has to grow. The experts at Investing Daily recommend saving 10%-15%
of your income for retirement, yet many people contribute only enough to get the
employer match, typically 3%-6%

Sad fact is, the average amount of retirement savings of most Americans is
woefully inadequate. Take a look at the following chart. If you’re approaching
the age of 70, do you think a nest egg of less than $280,000 is enough to retire
comfortably? I didn’t think so.



The Fix: Start contributing to your 401k as early as possible, even if it’s a
small amount. The power of compound interest makes a significant difference,
especially in the early years. Even small contributions add up over time.

WATCH THIS VIDEO: How to Thrive in Retirement

Avoid these eight common mistakes by contributing enough, keeping an eye on
fees, diversifying your portfolio, and resisting the temptation to cash out
early. With regular check-ins and some strategic adjustments, you can maximize
the potential of your 401k and take steps toward a comfortable retirement.

Your retirement “gut check”…

How do you measure up in the above chart? Are you worried you’re not saving
enough for retirement?

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everyday reality…and it’s a proven way to supplement traditional retirement
plans.

The key to this success lies in a unique trading approach developed by one of
the sharpest minds in the field, Jim Fink.

Jim Fink is the chief investment strategist of our premium trading service, Jim
Fink’s Inner Circle. Jim has crafted what he calls “The 122% Trade,” a strategy
engineered to leverage even the smallest stock moves and transform them into
substantial triple-digit gains.

You could continue with your current investing approach and settle for average
returns like most people…OR you could join Jim Fink’s Inner Circle to access one
of the most effective trading strategies available to individual investors.
Click here to learn more.

--------------------------------------------------------------------------------

John Persinos is the editorial director of Investing Daily.

Subscribe to John’s video channel by clicking this icon:

 


ABOUT THE AUTHOR

John Persinos
Bio | Archive
John Persinos is the editorial director of Investing Daily, overseeing such
publications as Personal Finance, Utility Forecaster, Profit Catalyst Alert,
Rapier's Income Accelerator, Income Forecaster, and Marijuana Investing Daily,
among others. John also writes the Mind Over Markets daily stock market recap,
and he's the chief investment strategist of Marijuana Profit Alert.

 
John has decades of experience in the technology and political realms. He has
worked as a staff editor at Inc. and Venture magazines, and written for
Kiplinger's, Street Authority, Investing Answers, and TheStreet.com, to name a
few. In a career that has spanned more than 40 years, John has been diligently
and prolifically covering the news and its impact on investors.

 
John also has experience with the inner-workings of Capitol Hill, serving as a
press secretary to U.S. Rep. Byron Dorgan (D-ND). John started his career as a
daily newspaperman with The Orlando Sentinel.

 
John holds undergraduate and graduate degrees from Boston University. He also
completed the Davenport Fellowship in Business and Economics Reporting at the
University of Missouri (Columbia).

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