Some Mistakes You Should Avoid While Investing In A 401k

11
March

Saving for retirement is perhaps one of the most important financial responsibilities of today’s workforce, and there is no guarantee whether any additional money will be available from social security or private pensions. Because an individual will most likely have to rely upon the money that they have saved to support them the rest of their lives, mistakes made while investing in a 401k can prove to be particularly detrimental to long term success. The biggest mistake is not to save anything at all for the golden years, and nobody can force a person to be responsible unless they are completely willing. The following guide will help a consumer prepare to avoid the other common mistakes while investing in a 401k.

Although most companies no longer offer any type of defined benefit pension programs, the majority of corporations will make matching contributions to their employees’ 401k plans. Too many employees fail to participate in the company’s retirement plan, and the simple fact of the matter is that it’s as foolish as refusing a raise. If a company is willing to match dollar for dollar up to a certain percentage, the basic concept is that an individual can have money taken out of their paycheck that will basically double when it is invested in their 401k. Many company match programs will allow a person to gain an extra $1500 or more every year that they participate, and almost nobody would willfully turn down a raise worth that much.

Choosing investments can be a tricky endeavor, but the biggest mistake is investing all of the available money in one stock. An old adage advises people not to have all of their eggs in one basket, and it is normally a bad idea to completely trust retirement funds to one stock. Even the largest of companies encounter problems that could severely impact the value of the stock, so there should be a mixture of investments. Once the investments are chosen, the principle of dollar cost averaging makes it a good idea to keep the original choices and not constantly move money around. It is important to realize that a 401k is a long term strategy, and it is not necessary to make changes every day unless an employee is about to retire.

The investment choices that a person makes are often either too risky or too conservative, and the stance that an individual should take relies mostly upon their age and working environment. If a young person has years to save before they retire, the 401k has a much longer time to grow and rebound from any potential losses. A riskier growth portfolio could be appropriate for a younger person, but an older person should not be trying to make as much of a return as possible. There is a time to take risk and there is definitely a time to be conservative, and an individual needs to learn the difference. Most 401k plans have an advisor that employees can speak with, and an ever increasing number of programs actually have already selected investments based on age and years until retirement.

If an individual leaves their current position, the absolute biggest mistake of all is cashing out a 401k. The amount of money that is lost to taxes and penalties can be nothing short of staggering, and an individual will basically be starting over at their next job. Retirement savings are focused on growing over time, and prematurely cashing out a 401k takes away the length advantage. A person will never meet their goals if they do not leave their money alone. The same holds true for employees that continually borrow from their 401k, and the money lost should not be played down.

As long as a person is actively investing in their 401k, most of the mistakes can be remedied if they have already been made. The above tips can help an individual make the best decisions, and the results will be a much larger nest egg.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

Email  • Google + • Twitter

Comments are closed.