Throwing money in a 401(k) every month is a good start toward a comfortable retirement. But if that's all you're doing, you could be missing out on some critical opportunities to maximize your money's growth. You need a strong understanding of your 401(k) and its investments if you want to avoid the following three common mistakes.
1. Worrying too much about short-term losses
Most people don't plan to tap into their 401(k)s until retirement. If you're decades away, it's not always a major issue if you lose a little money in the near term. I know it doesn't feel good when you check your portfolio and find it worth considerably less than the day before. But ups and downs are just part of investing. It doesn't mean you've done anything wrong.
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It's usually best to resist the temptation to sell your investments or pull your money out of your 401(k) in a hurry. You'll owe taxes on your withdrawals if you do this, plus a 10% early withdrawal penalty if you're under 59 1/2. Not to mention you're locking in the loss. Had you left your investments alone, they may have recovered in time.
Try to stay calm and don't check your portfolio every day. Limit yourself to just a few times per year unless you experience a major financial change, like a raise, a new job, or a new family member joining your household.
2. Skipping your 401(k) match
You should claim your full 401(k) match from your employer whenever possible so you can reach your retirement goals more quickly. Your employer may only give you a few hundred or a few thousand dollars today, but that could easily grow into five or six figures after it's been invested for several decades. When you skip your match, that's what you're really missing out on.
If you can't afford to claim your full match, do the best you can. Put your money in your 401(k) before any other retirement account and increase your contribution percentage before you do anything else when you get a raise.
If you're not sure how much your 401(k) match is worth, talk to your company's HR department or your plan administrator. They will be able to help you figure out exactly how much you need to save in a year to claim the full match.
3. Paying too much in investment fees
All investments have fees, including those in your 401(k). Because these fees come directly out of your account, it's pretty easy to lose track of how much you're actually paying each year. Your goal is to keep your fees as low as you can so you can hold onto more of your money.
If you've invested in mutual funds or exchange-traded funds (ETFs), fees come in the form of expense ratios. These are written as a percentage of your assets -- for example, 1%. This means you pay the fund manager 1% of all the assets you have invested in the fund each year. As a general rule, try not to spend more than 1% in fees if you can.
You can find out what you're paying in fees by looking at the prospectus for your investments. You should get a copy of this electronically or by mail each year. You can also look it up on the fund company's website.
If you feel you're paying too much in fees, look at the other investments available to you and compare their costs, performance, and outlook. Think about how it fits in with your risk tolerance as well. Make changes as necessary. If you're unsure how to do this, talk to your plan administrator or HR department.
This isn't an exhaustive list of 401(k) mistakes, but if you can avoid the three above, you're doing pretty well. Keep the suggestions here in mind and review your 401(k) strategy periodically. Investment fees can change, and so can your company's 401(k) matching formula. Your own risk tolerance will change as well. So check in with yourself every year to see if you need to make any changes to your contribution amount or investing strategy.
