Five 401K Mistakes People Don’t Realize

Here’s the five biggest mistakes I believe people make with their 401k. Mistake number one is not contributing enough to get the full company match. When you’re actively contributing to your 401k make sure you’re putting in enough to get the match, but you also want to think about how much money you’ll need for retirement. I see people all the time that are not putting enough money into their 401k, or into other investments to get them where they need to be for their retirement. For instance, they’re only putting in the 5% for their company to match, because they don’t see any benefit in putting anything more than that. So understand how much you’re putting in, and if it’s going to be enough for you to reach your retirement goals.

Mistake number two is trusting target date funds. Now I do think there’s a lot of advantages that target date funds have, but you really want to take some time to understand what’s going on inside these target date funds, and what’s the allocation between the stocks and bonds. If you’re a younger investor you may find that the typical target date funds may be part of these 401k plans that has way too much money in bonds, and that you should be putting more money into stocks. Because the target date funds don’t really grow as much as they should. Sometimes 80% of your portfolio could be put into risky stocks that could drop if the financial markets work against you. So understand how your money is being invested into your 401k.

The third mistake is investing too conservatively. If you’re a younger investor you should have a higher percentage of your portfolio invested in some stocks. Some people might be a little worried, because they think their 401k should be more diversified. Well one of the things that is nice about the 401k is that it contributes well to an investment concept known as dollar cost averaging. Because you’re contributing money to your 401k on a regular basis, usually every paycheck. Keep in mind dollar cost averaging doesn’t prevent you from losing money, but it is a way for you to kind of smooth out some of the ups and downs of the financial market.

Mistake number four is not moving to a more conservative asset allocation as you approach retirement. I recommend that people start thinking about shifting their asset allocation about five years out from retirement, and start thinking about putting more money into safer investment options.

Finally, the fifth mistake is not looking at the differences between the Roth option and the Traditional option. I think some people like the fact that their money comes out of their paycheck before it’s even taxed, so they just stay with the Traditional option. I think they should look into the Roth option too, because it could be beneficial in the future.