As the specter of a higher cost of living and growing savings shortfall looms, ensuring a secure retirement has become a paramount concern for many Americans. However, despite the undeniable benefits of workplace retirement plans, a significant number of savers are inadvertently missing out on the advantages. In this article, we unravel the most common mistakes workers make with their 401(k) plans, shedding light on how to navigate the complexities and optimize your retirement savings.
1. Unlocking the Power of Employer Matches
One prevalent mistake that financial experts often highlight is the failure to capitalize on the employer match. A substantial number of workers are not fully maximizing their employer-sponsored plans, missing out on the opportunity to build a more significant nest egg. It’s crucial for workers to contribute at least enough to their workplace retirement plan to leverage the benefits of the company match, if available.
Despite the widespread availability of employer contributions—98% of 401(k) plans make contributions—approximately 22% of participants are not receiving the full match, according to Fidelity data. Fidelity’s vice president of thought leadership, Mike Shamrell, emphasizes that many workers are unaware of their company’s match. The average company match is 4.7% of a worker’s salary, presenting a substantial opportunity for additional savings.
While the company match is a good starting point, we recommend you continue to increase your contribution at least until you’re contributing 15-20% of your salary. You can adopt the auto-escalation feature of your plan to steadily increase the amount you save each year. The recent increase in contribution limits for retirement accounts IRS provides additional room for maximizing savings.
2. Prudent Use of Funds in Challenging Times
With financial strains affecting many households, the temptation to tap into retirement funds has become more pronounced. However, taking money from a 401(k) plan can have detrimental effects on long-term savings. Despite this, recent reports indicate a growing trend of retirement savers withdrawing money to cope with high inflation.
If you choose to pull out money, you can take a loan or directly withdraw funds from your 401(k). A 401(k) loan typically allows borrowing up to 50% of the account balance with a maximum of $50,000. You must pay the loan back with interest within five years. There are numerous potential pitfalls with 401(k) loans, so be sure you educate yourself fully. When a direct withdrawal is taken, you will generally pay tax and a 10% tax penalty unless you qualify for an IRS exception.
3. Embracing a Long-Term Investment Perspective
Investing for the long haul requires a disciplined approach that transcends short-term market fluctuations. The key lies in maintaining an appropriate asset allocation and contributing consistently, irrespective of market conditions. A significant market downturn in 2022 saw 401(k) account balances lose nearly one-quarter of their value. However, staying the course has proven fruitful, with the average balance now up 11% from a year ago.
It’s also important to make adjustments as you near and proceed into your retirement years. Age-based guidelines can provide a framework for maintaining a steady course and avoiding unnecessary risks.
Optimizing your 401(k) for a secure retirement requires strategic planning and an understanding of the potential pitfalls. By capitalizing on employer matches, refraining from premature fund withdrawals, and adopting a long-term investment perspective, you can confidently navigate the complexities of retirement planning.