A lot of times when you get a new job, the company may enroll you automatically in their 401 (k) program. The problem with this is that most employers start with a contribution rate of 3% and workers are not increasing their contributions. (Source: CNBC) If an employee starts at that 3%, that person should bump up contributions by setting up an automatic increase, either annually or with with each raise. This way a person can be sure that they are saving as much as they can.
Financial mistakes are costing us big time! Some of the biggest mistakes Americans are making with our 401(k) can easily add up to hundreds of thousands of dollars. SHP Financial Co-Founder and Certified Financial Planner™ Matthew Peck talked with WJAR Providence about foolish mistakes we’re making with our 401(k)s. Here's some of what Matt had to say:
Mistake #1 Leaving Money on the Table
One in five Americans is leaving money on the table by not getting the full employer match (Source: USA Today). The majority of employers (75%) will match your 401(k) contributions, up to a certain percentage. A common scenario is for the employer to match your contributions dollar for dollar up to 6% of your salary (Source: Zenefits).
So why are so many people missing the company match? Many people just don’t want to reduce their take home pay, but you are missing out on free money if you choose not to take advantage of a company match. It's hard to think years ahead, but when you're ready to retire you will be thankful that you did. It would not be ideal to rely solely on social security. After years and years of working, you should be able to enjoy your retirement without having financial worry.
Mistake #2 Paying High Fees
The fees paid on a 401(k) may seem small, but they add up quickly! Take a look at the next statement to see how much is being paid in fees. Also, look at the company’s 401(k) plan rates. Saving additional money outside of a 401(k), like in an IRA or Roth IRA, should also be considered. It can never hurt to get help from a financial professional, if you are ever in doubt.
Mistake #3 Not Knowing when to Withdraw
Never withdraw money from a 401(k) before the money is needed in retirement. If money is withdrawn from a 401(k) before age 59 ½, that money will be taxed as regular income and a 10% penalty will need to be paid. (Source: Schwab) Consult a financial professional before taking any money from a 401(k) because there are very few exceptions to early withdrawal.
There are also penalties for not withdrawing money after age 70 ½. So you can get penalized for not taking money soon enough. There are required minimum distributions, or RMDs, and if money isn't withdrawn after that age, there are stiff tax penalties. (Source: Employee Fiduciary) The RMD rules for traditional 401(k)s can get complicated. It’s important to understand the rules to make sure penalties aren't being paid, which decrease the balance. Click here for a link to an RMD Caclulator.