The start of a new year is a great time to take a hard look at your 401(k). What are you doing? How much are you saving? How can you do more to prepare for a stable and happy retirement?
And, you should be taking a hard look at avoiding some simple mistakes that could end up costing you big down the road.
Don’t fret, however, these mistakes are easy to avoid – and once you know what are looking for, you can make corrections and continue saving for the future with confidence.
So, what should you look for? Here are three things. Read on:
Not saving at all – or saving enough
If your employer offers a 401(k) or a matching program, make sure you are taking advantage of it! Sadly, not everyone who has access to a 401(k) uses it, so if you are one of those people, make this year the year you start to take advantage of this benefit and start funding it.
A 401(k) is beneficial to you because it comes off your taxable income, meaning you could owe less in taxes. Also, it helps you grow your wealth with compounding interest – meaning you can save faster. How? A basic savings account at a bank or credit union only offers interest rates of about 1% or less. But if you are more aggressive with the funds you choose for your 401(k), you can make five (or six, or eight) times that annually.
And some employers will match your contributions up to a certain amount, which is like free money.
Taking out a loan
Just because you CAN borrow from your 401(k) (and generally, plans let you borrow up to half of the amount), doesn’t mean you SHOULD. It can be tempting to take some of your savings – especially if you have a financial need – but it’s almost never a good idea.
Why?
A few reasons.
If you take it out, you will earn less money. There are also taxes and fees you’ll have to pay, meaning it can be a costly decision.
And generally, you’ll have to repay the loan with interest in five years, meaning it could create an even greater financial burden in the long run.
Walking away from the money
The fact is, most people will change jobs more than once during the span of their careers, and what happens to your 401(k) then? Many people just leave it be, because it’s easier or they forget about it.
However, this isn’t a good move. You could still be charged fees on that account.
Also, don’t you want to keep growing your money by transferring the savings you already have to a new 401(k) or another savings vehicle? Like an IRA? Of course, you do.
This can almost always be accomplished by calling your former employer and speaking to their plan administrator about rolling over your funds.
It might also be a good idea to talk to a trusted financial advisor about your options.
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If you have other questions about retirement savings plans, email us or call 937.308.0758.
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