Avoid costly retirement setbacks and make smarter 401(k) decisions now. A 401(k) is one of the most powerful tools to help build long-term wealth and secure a comfortable retirement. Given concerns about Social Security lasting beyond the next decade and pensions becoming rare, the 401(k) has become a main retirement savings vehicle for many workers. With benefits like tax-deferred growth, employer matching contributions and the discipline of automatic savings, it’s no wonder many people rely on this common retirement vehicle.
However, simply contributing to a 401(k) isn’t enough. Many people unknowingly make mistakes that can reduce their savings potential and jeopardize their retirement years. Here are the most common 401(k) mistakes to avoid and what to do instead to stay on track for the future you envision.
1. Not taking advantage of an employer match If your employer offers a contribution match, this means that any contributions you make to your 401(k) are matched with a contribution up to a certain percentage. While employer 401(k) matches vary by company, it is often between three and six percent and can range from partial to dollar-for-dollar. If you don’t elect to contribute at least enough to get the full match your company offers, you’re essentially leaving money on the table.
2. Not rebalancing your investments The “set it and forget it” mindset isn’t a good idea when it comes to your 401(k). Investments grow at different rates over time and sector performance varies year over year. Your portfolio can drift out of alignment with your retirement goals without a regular review and rebalance . Rebalancing too often to chase performance isn’t a good idea either. If you have questions about your target asset allocation, consider consulting a financial advisor.
3. Investing too much in your company’s stock Some employers allow you to invest in company stock within a 401(k). While this can be a great opportunity to share in your company’s growth, too much company stock increases risk. Financial experts suggest keeping employer’s stock to around five to ten percent of your portfolio. If you also have stock options outside a 401(k) account, a lower percentage might be considered. Portfolio diversification protects your retirement savings if your company faces challenges.
4. Sticking to the same contribution rate for years When starting a 401(k) at a company, many people stick with the default rate of two or three percent to avoid feeling a pinch in their paycheck. According to a Vanguard study, around 60 percent of employees that enrolled in a new company’s plan just accepted the default rate. You should always check the box for automatic annual contribution increases. If you get a raise, it is smart to increase 401(k) contributions more. Aim for between 10 and 15 percent per year to save enough for retirement.
5. Leaving your 401(k) at a previous employer When you leave a job, choose not to leave your 401(k) behind . Investment options are more limited in 401(k)s than in IRAs, which can affect performance. It can also be challenging to manage separate 401(k)accounts and keep beneficiary designations updated. The rollover of a 401(k) into an IRA account helps you consolidate, have control of your account, and likely gain access to a wider range of investments.
6. Taking an early withdrawal to pay debt Seeing your 401(k) balance grow can make it very tempting to take an early withdrawal to pay down debt or help cover life expenses. But if you withdraw funds before the age of 59 ½, you’ll owe income taxes in that amount plus a 10 percent penalty on top of that. While there may be certain cases like medical emergencies when it’s necessary, tapping you’re your retirement savings will automatically decrease your retirement nest egg.
7. Ignoring Roth 401(k) options Some employers offer Roth 401(k) accounts in addition to traditional 401(k)s. While traditional 401(k)s let you contribute pre-tax dollars for retirement, which lowers your taxable income now, Roth 401(k)contributions use after tax dollars. So, when you take qualified withdrawals in retirement from a Roth 401(k), they will be tax-free. Dividing contributions between both account types may be a smart idea, depending on your situation.
8. Not working with a financial advisor If you lack the time or confidence to manage your 401(k) and investments, a financial advisor can help . They can help with account consolidation, rebalancing and understanding how your 401(k) fits into your overall portfolio. A financial advisor can help you build a long-term strategy and provide retirement planning advice.
There are many factors that can delay your retirement and cost you money when it comes to your 401(k). Your 401(k) account is a key part of your overall financial plan. For customized financial planning to help you reach your financial goals, or if you have questions about your current financial plan, click here to schedule a time to speak with a Bayntree financial advisor .
In Summary: 8 Common 401(k) Mistakes to Avoid
Mistake
Why It Hurts
What to Do Instead
Not maximizing employer match
You're missing out on free money
Contribute at least enough to receive the full match
Not rebalancing investments
Portfolio may drift from goals
Review and rebalance regularly, ideally once a year
Over-investing in company stock
Increases risk if the company falters
Limit to 5%-10% of portfolio for better diversification
Keeping the same contribution rate
May not save enough for retirement
Gradually increase contributions; aim for 10% to 15% annually
Leaving 401(k)s at old jobs
Harder to manage and limited investment options
Roll over to an IRA for more control and flexibility
Taking early withdrawals
Triggers taxes and penalties, reduces nest egg
Avoid unless absolutely necessary (e.g. medical hardship)
Ignoring Roth 401(k) option
Miss out on tax-free income in retirement
Consider a mix of traditional and Roth contributions
Not working with a financial advisor
Missed opportunities for optimization
Get professional guidance for a personalized plan
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Investment advice is offered through Bayntree Wealth Advisors, LLC, an SEC-registered investment adviser. Insurance and annuity products are offered separately through Bayntree Planning Group, LLC. Bayntree does not provide, and no statement contained herein shall constitute, tax or legal advice. You should consult a tax or legal professional on any such matters. Opinions expressed herein are solely those of Bayntree Wealth Advisors. All content is for informational purposes only and is not intended to provide the basis for any financial decisions.
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