Mistakes You Must Avoid in a 401k Retirement Savings Plan
People saving for their retirement days expect that things will go smoothly and hassle-free. Then, some common mistakes make it challenging to help your nest egg to grow. According to an article published in CNBC, current research at Boston College showed that a man of 25 years of age contributed frequently to his 401k that began in 1981 and should have savings approx. $360,000 by 60 years. However, this man has 401k savings below $100,000.
What does the research indicate? Well, investment mistake is the obvious answer to that question.
- Contributing under the match
If a company provides a 401k plan, then it might also provide a match for that plan. Studies indicate that on average, 401k match did reach just 4.7 percent in 2019. This data was based on a firm managing over 30 million accounts for retirement. However, only one-third of people contributes much less and is under the usual match rate, thus leaving funds on the table.
The solution is to increase your investments gradually with time, particularly if there is an increase in your income. Some people choose auto escalation implying that the amount of contribution will shoot up by 1 percent each year. You need to consider this option to avoid missing the money.
- Not contributing regularly
Some people think that skipping to contribute for a couple of months will not have any significant impact. Wrong! On the contrary, skipping to invest will reduce the total sum of money considerably. This fact has been corroborated by senior wealth planners in the industry and so not just hearsay.
The solution is to keep investing regularly. Even missing to contribute for some months will reduce your savings. If you want to learn more about how to contribute and the benefits of contributing regularly, visit solo401k.com.
- Cashing out
This is one of the biggest 401k mistakes. Yes, people frequently withdraw funds from their retirement savings accounts when requiring money or leave their job. The common reasons for cashing out are paying old debts or a sudden medical expense. Though medical emergency is a need and should be catered to, we recommend that you avoid withdrawing money from your 401k account.
If you resort to cashing out, you will have to pay hefty penalties and taxes wiping out a considerable portion of your savings. You can avoid this by creating an emergency fund where you can set aside some money every month. Then, do not use this savings fund for buying movie tickets or meeting your personal expenses.
You may even take a loan from your 401k plan, which is better than sudden and frequent withdrawals. You will have to return the money borrowed within a specific period. Withdrawing money from your 401k account should be your last recourse. Try out other options to arrange for funds if there is a pressing need.
Now that you know about the mistakes in 401k savings and their solution, make the most of your retirement account to live comfortably in your golden years.