Don’t Make a Big 401(k) Mistake!
“Balancing a retirement and college savings can be overwhelming.”
Far too many Americans undervalue their employer-sponsored retirement savings accounts, especially when their employer is willing to match some, or all, employee contributions. While most workers with 401(k) plans contribute more than enough to take full advantage of their employer’s matching program, there are still about 20% of people who don’t. That’s 20% too many!
USA Today recently ran an article, “1 in 5 Americans are making a terrible 401(k) mistake” that says this may be one of the worst retirement mistakes you can make. While it may not look like a lot of money to ignore right now, you’d be surprised at the difference it can make when you retire.
About three-quarters of companies offering 401(k) retirement plans have some type of matching program, usually based on an employee’s contributions and capped at a percentage of their salary. For example, a 401(k)-matching policy may be “50% of employee contributions, up to 6% of total compensation.”
Therefore, if you earn $50,000 a year and contribute $3,000 to your 401(k) or 6% of your salary, your employer will contribute an additional $1,500 into your account.
But again, there are 20% of the participants who don’t contribute enough to take full advantage of their employer match. Apart from cashing out your 401(k) and spending the money, this may be the worst retirement savings mistake you can make.
Your employer match is vitally important. The maximum contribution level your employer is willing to match, should be the least you put into your 401(k). if you don’t do this, it’s like turning down free money.
This happens frequently with younger people just beginning their careers. They may feel that if you’re starting your first job with an employer-sponsored retirement account, it’s difficult to effectively reduce each of your paychecks by 5% or more to contribute to a retirement account.
However, many employers’ 401(k) plans now have automatic enrollment for new hires, usually with a low contribution rate such as 2% or 3%. However, many people simply forget to make a change to up their contributions.
Remember that your employer’s matching contributions are really another part of your compensation that you give up, if you don’t contribute enough into your retirement account.
Reference: USA Today (February 12, 2018) “1 in 5 Americans are making a terrible 401(k) mistake”