401k Mistakes You Didn’t Know You Were Making

A piggy behind a broken glass.Economy concept
01 Dec 2018

We get the opportunity to speak to a lot of people about their 401(k) plans.  Because of this, we see a lot of mistakes people are making in their plans.  Here are just a few examples where we have seen people going wrong with their workplace retirement plans.

#1 You Borrow from Your 401(k)

Borrowing from your 401(k) comes with lots of negatives. I know, it seems like an attractive place to dip into in the event of an emergency. The reality is that you are sacrificing your future to cover shortfalls today. Borrowing from your 401(k) removes funds that would otherwise be invested in the markets.  In addition, should you quit or get fired from your current job, the amount of the loan must be repaid, otherwise it is considered a distribution from the plan. That amount is then subject to taxes at your top marginal rate, as well as a 10% penalty if you are under 59.5 years old.

#2 Not Starting Contributions as Soon as Possible

There is an old Chinese proverb that says “When is the best time to plant a tree?  20 Years ago.  When is the second best time to plant a tree?  Today.”  This can be applied to your investment accounts as well.  Even if you did not take advantage of retirement contributions early in your career, you should start today.  The value of investing for retirement is not trying to perfectly time the markets, but allowing your funds as much time in the markets as possible.

#3 Not Contributing Enough to Get Your Company Match

Let’s face it. You work hard. But what if I told you, you are cutting your own paycheck? That is exactly what you are doing if your company offers a match on your retirement contributions and you are not taking advantage of it.  Your company has pledged funds for your future.  All you have to do is take them.  By not meeting the matching amount at the minimum, you are effectively telling your company that you are not worth the wage they have set aside for you.

#4 Only Contributing Enough to Meet Your Company Match

I know, I know, I just said that one of the mistakes we commonly see is that you are underpaying yourself.  Unfortunately it doesn’t quite stop there.  The reality is that your retirement has the potential to last 30 years or longer!  Only making a contribution up to the match may not provide you enough funds to last your entire retirement.  You need to know how much you should be contributing given your unique income goal.  This starts by figuring out how much money you will need at retirement to fund all of your goals.  Once you know this you can match that with your Fair Rate of Return goal. Then you can figure out exactly how much you will need to contribute on a monthly basis to have a successful retirement.

#5 Not Investing According to Your Personal Risk Tolerance

You are different from your neighbor and brother.  Your portfolio probably needs to be different as well.  One of the myths purveyed by the financial community has been that if you are young, you must take more risk in your portfolio, and if you are nearing retirement, you must only invest in “safe” assets.  The reality is that this ignores individual preferences and ability to accept risk.  A young person may not be able to stomach the ups and downs of the equity markets, and should invest in a way that allows them to stay in their portfolio.  This will allow them a greater opportunity to stay the course and reach their financial goals.

#6 Leaving Your Old 401(k) at an Old Employer

401(k) plans have administrative charges associated with them. While you are working, the employer will typically cover the cost of the administration.  When you sever your employer/employee relationship, these may be passed along to you.  Additionally, it may be more difficult to administer your assets at the old plan.  You may be incurring not only additional cost, but the frustration that may come with trying to administer an old plan.  Moving the assets to your new plan, or rolling them to a Traditional IRA may allow you additional flexibility and ease of administration.

Hopefully, this has given you some insight into some of the mistakes that we see plan participants making every day. Not to worry though, there are a lot of ways to help maximize your wealth creation using this and other tools. Click the link below to get a free risk analysis today.

How much risk are you taking?

Is your risk level in line with your current portfolio?


Casey Mushrush

Have a question or want to see a post written about a specific subject? Send me an e-mail at casey.mushrush@premieriowa.com. I am involved in many of the educational elements of Premier Investments of Iowa, including appearances on WMT Radio, WHO Radio, KXEL Radio, and KCRG Television. In addition, I am a frequent guest host of the Premier Pulse, a personal finance education video blog. I partner with my clients to develop a specific set of financial goals based on their personal situation. We analyze their state of affairs, map out a course of action, and implement a written financial plan based on their own circumstances. We design and implement a long term investment strategy guided by the principles of asset allocation and based on personal risk tolerance. I utilize behavior coaching to help clients deal with the emotional aspects of investing and stick to their long term plan. Additionally, I am responsible for the practice management of an Office of Supervisory Jurisdiction. I aid our advisors by ensuring they are running their businesses in a compliant manner, as well as providing direction and suggestions on process improvement and implementation.