With student loan debts averaging almost $30,000 for millennials, it’s no surprise that saving for your future often takes a back seat. I know it’s incredibly challenging, but I am here to motivate you to keep telling yourself, “The tougher you are on yourself today, the easier life will be on you later!” When it comes to an employer sponsored 401(k), one should avoid the following mistakes:
Leaving Money on the Table: Billions of investment dollars are left on the table, each year, by employees who just don’t take advantage of their employers who often match, dollar-for-dollar, the first 3 percent or more of their employees’ income in 401(k) plans. Don’t throw away free money!
Considering Your 401(k) as a Glorified Savings Account: Many 401(k) plans also allow employees to take loans from their 401(k), enabling you to access a portion of your money if needed before retirement. Take advantage of this opportunity in an emergency rather than using your retirement account as a glorified ATM.
Liquidating Your 401(k) When You Switch Jobs: When you leave your employer, you have the option to liquidate the investments inside your 401(k) plan. However, it’s imperative to understand the consequences. Uncle Sam will hit you with some major taxes as well as that frustrating 10 percent penalty if you’re under the age of 59½. It’s beneficial to rollover the 401(k) plan from your previous employer to the 401(k) plan with your new employer.
Failing to Rebalance Your 401(k): It is all too common to see new investors put time and energy into choosing an array of diversified investments inside of their 401(k), then let the funds ride over extended periods of time to the point where they become out of balance. Meet with your company’s plan administrator each year to review your current allocations and portfolio choices.
Avoiding Risk Completely: Many investors who do not feel confident in their ability to invest intelligently seem to steer clear of risk completely. So they place their money in what they consider safe investments such as CDs and the money market. These investments usually do not keep pace with the inflation rate. While they may see their account value increase slightly each year, they are actually losing purchasing power.
Not Increasing Your Savings When Your Income Increases: All too often, when people receive a 5 percent raise, they increase their standard of living by 7 percent rather than maintaining their level of comfort and increasing their 401(k) contributions. It’s important that you increase the amount you put aside based on the amount you earn. So celebrate your next raise and all the raises that follow by increasing your retirement account contributions each time.
About the Author: David Rosell is author of “Failure Is NOT an Option – Creating Certainty in the Uncertainty of Retirement and Keep Climbing – A Milliennial’s Guide to Financial Planning”. He is president of Rosell Wealth Management in Bend, Oregon.