The benefits of a 401k workplace retirement plan are substantial, with tax breaks that effectively increase your potential return on investment while allowing you to plan for your future retirement. The average employee thinks about his or her 401k most on the first day on the job, making important choices quickly about automated allocations of their paychecks into this investment account. Feeling like their crunched for time, employees will often make snap decisions about their investment allocations, and these 401k mistakes can lead to missed opportunities decades later.
While there is much to be said for automating your finances in order to save without feeling the pinch, your 401k needs periodic tune-ups in order to remain truly healthy and grow as much as possible. Just a few careful choices and discussions with a wealth management professional can help you make the most of the money you’re carefully putting aside for retirement.
Here are 5 of the most common 401k mistakes employees make:
- Waiting too long to start saving
- Lack of understanding about risk and various savings options
- Consistently monitoring and rebalancing
- Misunderstanding Key Features
- Not factoring in the larger estate planning picture
Now, let’s dive into each mistake in more detail and explain how you can avoid them.
1. Waiting Too Long To Start Saving
While it is completely reasonable that younger workers have tight budgets, wealth management professionals everywhere will point out that a little bit saved when you’re younger can have as much impact as more money saved in the prime of your career. If you didn’t allocate enough to get a company match, you’re leaving money on the table that is allocated to you. Try moving up your allocations by 1% or even .5% per year, and you’d be surprised by how minimal the change in take-home pay is.
Given that investments in the market tend to take 7-12 years to double, you want as many doubling cycles as possible before your target age for retirement. The best time to start saving, or to start saving a little more, is absolutely right now.
2. Defaulting Into Funds Without Understanding the Risks and Your Options
If you’ve taken the first step and avoided the mistake of waiting too long, congratulations! It’s a great start. However, you still are leaving money on the table if you don’t evaluate where your money can go. Most 401k plans have a variety of fund options. Each one has a different level of risk, as seen by the percentage of stocks and bonds it contains.
They also have different triggers for rebalancing. Target-date funds, for instance, rebalance to reduce your risk profile as you approach your target retirement age. Many 401k plans automatically choose one of these age-based or target-date funds for your money, and a lot of employees stick with that fund.
A wealth management professional can help you evaluate what other options are available for you, potentially with lower fees so that you retain more of the returns from your investments, or with a more appropriate balance of stocks and bonds to maximize
your current needs for returns and security. Not all of the ‘default’ options in a 401k plan are created equal, and we can help you evaluate what really gives you the best options.
3. Going Years Between Looking at Your Fund Options
401k plans change, and your priorities also change. If you wake up and realize you haven’t reconsidered your options in 7 or 8 years, your portfolio may be unnecessarily risky with too many stocks, or could be underperforming in the market because you’ve overly invested in bonds. Even if it turns out that you have a great balanced portfolio, it makes sense to look at how your 401k is performing with the help of an expert.
Checking in at least once a year will not just help you make small adjustments to rebalance your portfolio, but will also teach you more and more about the funds you are investing in. This process may get you excited about managing your money and make it more positive to check in every couple of months instead of every decade.
4. Misunderstanding Underutilized Features Like Auto-Rebalancing
Many 401ks have some simple, helpful features that can make it easier to manage your risk and boost your returns over time. One example is auto-rebalancing, where your account would automatically sell and buy stocks and bonds to make sure that your account remains within the guardrails of risk that you have established for it.
You don’t have to be tinkering with your account every pay period in order to get really strong value out of the money you’ve invested. However, you’ll know more about the ins and outs of your plan if you meet with a wealth management professional and can be guided through the features you haven’t used before. We have seen a lot of different 401k plans and can help you maximize your impact on your investments without using a ton of your valuable time.
5. Leaving Your 401k Out of an Overall Estate Planning Picture
People may incorrectly assume that, when they create a will, it is more binding than all other beneficiary information they’ve created for things like 401ks and life insurance policies. In reality, when you fill out your beneficiary information for your 401k, that is the person who will receive any remaining funds upon your death, unless you update it. It can be a major mistake, since lives change and you don’t want your beneficiary information to be out of date if someone new in your life is depending on you.
In general, however, it makes the most sense to treat all of your money and investment products as part of a single plan, both for your own goals, like retirement or paying for a child’s college, and for your legacy through your estate plan. When you work separately with your 401k administrator, and with an insurance salesperson, and with your local savings bank, it can be hard to make decisions that keep in mind an overall, holistic vision of your goals as well as the risks you are willing to take on to achieve them.
Avoid 401k Mistakes By Working With The Right Advisor
At Bogart Wealth, we take the time to get to know you, your goals, and your plan for achieving them. We make sure that we inform you of the consequences of default funds in your 401k as well as many other automatic choices that people make in their financial lives. We also help you look at the next few decades and anticipate the needs you may have so that you have a feeling of peace of mind and positive anticipation. Get in touch with us today to learn more and speak with us about your financial future.