If You’re Counting On A 401(K) For Retirement These Are The Mistakes To Avoid First

investing in a 401(k) is a simple and effective way to save for retirement — if your company provides this type of workplace plan. You may actually be enrolled in your 401(k) by default so you won’t have to do anything at all to get signed up. Your company will likely also match at least some contributions that you make, which means you get free money for investing in the plan. And, the government provides tax breaks when you contribute, which means each investment doesn’t reduce your take-home pay as much. 

However, while a 401(k) can be a great account, it’s not a perfect one. If you are counting on your 401(k) to provide most or all of your retirement funds, there are a few key mistakes you’ll absolutely want to avoid. 

1. Not paying attention to fees

Some 401(k) plans have administrative fees you must pay. Many also have a limited range of investments, some of which have high expense ratios. Unfortunately, these fees can eat into the returns you earn and leave you with a lot less money than you should have as a retiree.

If your 401(k) has high fees, your best bet is actually going to be to invest only enough in it to earn your full employer matching contribution. After that, switch to investing in an IRA until you’ve maxed that account out. You can often avoid fees entirely in an IRA since you can open the account with any brokerage firm — and you’ll have a much broader array of investment options so can look for assets to buy with very low expenses. 

Keeping your fees to a minimum will make a huge difference in your retirement security, so find out ASAP how much your 401(k) is costing you so you can make informed choices.

2. Choosing the wrong investments 

When you put money into a 401(k), you have to buy investments. As mentioned above, many 401(k) plans offer very limited options. You may have only a few funds to select from. 

Target date funds are very common in 401(k) plans. These invest in an appropriate asset mix for you based on when you plan to retire. Unfortunately, they can be expensive and may not expose you to the specific level of risk you’re comfortable with — especially if you aren’t 100 spot on about what your target retirement date is. 

Before you pick a target date fund, or put your money into any of the funds your 401(k) offers, make a strategic investing plan that keeps your goals and timeline in mind. If you aren’t sure which investments make sense or how to make this plan, consider talking with a financial advisor who can help. 

Picking the right investments can maximize your returns while exposing you to an appropriate level of risk given your overall situation — including other assets you have money in outside the 401(k). 

3. Borrowing against your plan

Many 401(k) plans provide you with the option to borrow against your plan without facing early withdrawal penalties. These loans can sound attractive since you’re essentially borrowing against yourself and paying yourself interest — plus, you don’t need to qualify based on credit score like when you borrow from a private lender.

Unfortunately, borrowing against a 401(k) is a bad idea. You risk not being able to get the money paid back in time and having the distribution treated as a taxable withdrawal, which triggers penalties. You also miss out on compound growth the money would have earned while you’re borrowing it — and over time if you never put it back. 

Raiding your retirement plan should be avoided except in absolutely dire situations, so just say no to borrowing against your 401(k) unless you have absolutely no other choices. 

4. Forgetting about 401(k)s you’ve left behind

Surprisingly, many people leave a job where they have a 401(k) and forget to take the money with them. You can leave your funds invested in your existing 401(k) even after leaving your job, but you run the risk of forgetting about the account entirely over time — especially if you change jobs a lot. 

Instead of leaving your account alone, consider rolling it over into your new employer’s plan or into an IRA. This would allow you to have all your accounts together so you don’t forget any — and also so you can manage your overall asset allocation appropriately. 

5. Not understanding the rules for withdrawals 

Finally, you need to understand that with limited exceptions, you can’t take money out of your 401(k) without incurring a penalty until you are 59 1/2. Because of this, if you’re thinking about early retirement, it pays to put some money elsewhere like a taxable brokerage account you can live off until you hit your retirement age. 

The good news is, these mistakes are easy to avoid. You just need to be aware of them and make sure you’re investing in the right assets, putting money into your 401(k) only if it belongs there, and leaving it there until you’re ready to withdraw it to fund your lifestyle after you’ve left work for good. 

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