When it comes to saving for retirement, there’s perhaps no easier tool to use than the 401(k). With a 401(k), your contributions are deducted from your paychecks automatically.
That means you won’t be tempted to spend the money you’re supposed to be socking away for retirement on other things. Rather, that money will disappear from your net pay before you get a chance to use it elsewhere.
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But if you’re going to save for retirement in a 401(k), it’s important to do so strategically. And that means avoiding these mistakes.
1. Not contributing enough for your full workplace match
If your employer offers a 401(k) match, consider it a real gift. Granted, it’s a gift that probably comes with a catch — you have to contribute money out of your own paycheck to get that free cash. But it’s worth doing.
Not only can your employer contributions boost your 401(k) balance immediately, but you can also invest those matching dollars for added growth.
2. Being too conservative with investments
You may be hesitant to invest your entire 401(k) in the stock market. And that’s understandable. But if you invest too little of it in stocks, you could end up with sluggish returns that leave you with a smaller balance over time.
Consider this: A $500 monthly 401(k) contribution invested at a yearly 8% return, which is a bit below the stock market’s average, could result in a balance of about $680,000 after 30 years. A more conservative 6% return leaves you with just $474,000, all other things being equal.
3. Depending on a 401(k) alone
Since 401(k)s make it so easy to build retirement savings, you might assume that funding one is enough. But 401(k)s generally don’t let you hold stocks individually as IRAs do. And not branching out into an IRA could mean losing direct access to winning companies that could make you rich over time.
Also, with a 401(k), you’ll typically face a 10% early withdrawal penalty if you take a distribution before turning 59 and 1/2. You never know if you might end up wanting or needing to retire early, so keeping some of your long-term savings in a taxable brokerage account makes sense. That way, you’ll have penalty-free access to your savings at all times.
While 401(k)s are terrific in their own right, it’s important to approach yours carefully. That means not neglecting your workplace match, taking on an appropriate amount of risk, and branching out to not limit your investment choices or withdrawal options.
