401(k)s are an essential part of retirement planning for many Americans. Because of their importance, it’s critical to avoid making mistakes with a 401(k) strategy.
Make sure you know what you need
The first common 401(k) mistake is simply not thoroughly understanding your retirement needs. Figuring out how much money you’ll need to maintain your preferred lifestyle during retirement isn’t easy, but it’s essential.
A surprising number of people head into retirement without an understanding of how much income they’ll really need to enjoy — rather than simply survive — retirement.
Crunch the numbers
You should closely examine the numbers annually, at a minimum. Even if you aren’t entirely sure how you want your retirement to look, running budget estimates can still help you gain a sense of where your finances are right now and whether or not you’ll likely have the money you need for your various retirement goals.
Ultimately, you should ask yourself what financial freedom means to you because there isn’t a one-size-fits-all definition. Generally, financial professionals encourage most folks to plan on replacing roughly 70 to 90 percent of their pre-retirement income to maintain a good lifestyle in retirement.
Make sure you’re saving enough
The next common 401(k) mistake that can come back to haunt you is saving too little. And don’t be fooled by auto-enrollments! While many employers automatically enroll new employees in their company 401(k) plan, the amount may not be enough to help you reach your personal retirement goals in your preferred timeframe.
Commonly, the amount saved in a 401(k) is about six percent. And even if you add the three percent match that many companies provide, you may still find yourself running behind on how much you need to be saving for retirement.
Clearly, not saving anything at all for retirement is a massive red flag, but not saving enough also imperils your dreams and visions for retirement.
Don’t ignore fees
Ignoring fees as the next common 401(k) mistake that you should work hard to avoid. The bottom line is that fees and related 401(k) expenses should always be top of mind. While it’s your 401(k) balance itself that will ultimately decide how much income you receive, it’s also true that fees and expenses can work together to dilute your growth potential.
You should note that 401(k) fees typically fall into three different categories, as defined by the U.S. Department of Labor: plan administration fees, investment fees and individual service fees.
Thankfully, the financial services industry has improved how fees are disclosed, but it’s fair to say that it can still be challenging for the average person to determine just how much they’re really forking over in both fees and expenses within their 401(k) plans.
Regularly review your 401(k) documents to try and determine exactly how much you’re paying. Larger plans can often have smaller expenses. You may also want to use the Fund Analyze tool that’s provided by the Financial Industry Regulatory Authority, more commonly referred to simply as FINRA.
Don’t miss out on matches
Another serious 401(k) mistake that many people fall victim to is wasting opportunities for matching funds. At its most basic, matching funds are simply additional income provided by your employer. If your employer offers a match on any percentage of your 401(k) contribution, you should strongly consider contributing at least enough to get the maximum company match.
This year, the 401(k)-contribution limit is $20,500 or $27,000 if you’re 50 or older.