Participating in a 401(k) or similar retirement plan is a great way to save for retirement. And these tax-favored plans are likely to become even more commonplace as a result of the recent pension reform law.
But surveys show that many employees fail to take full advantage of the saving opportunity. Here are five common mistakes to avoid.
1. Failing to participate.
Too many employees either don’t enroll in the plan or don’t contribute as much as they can afford. At a minimum, try to set aside enough to receive the full employer matching contribution.
For example, your employer might offer to match 30% of the first 3% of payroll. That match is equivalent to a 30% first-year return if you defer 3% of your salary. And that’s in addition to your investment earnings.
2. Over-investing in company stock.
Don’t invest too much of your plan contributions in company stock. Remember, even if the company is doing well now, things can change. And if the worst happens and you lose your job, you don’t want to lose your retirement savings too. (Think of Enron employees.)
If your employer uses company stock for the matching contribution, you may have no choice. But at least you can select other investments for your own contributions.
3. Failing to diversify.
Choose a well-diversified mix of investments in the plan. Then continually monitor and rebalance your investments as they grow.
Coordinate your investment choices with your non-401(k) savings to make sure you have an appropriate mix. Seek professional advice if you need it.
4. Borrowing from your plan.
Take a loan from the plan only as a last resort. Remember, these savings are for your retirement, not to fund everyday needs. When you borrow from the plan, you’re losing the tax-deferred growth on those funds.
5. Withdrawing your savings if you change jobs.
It’s tempting to cash out your savings if you change jobs. But if you do, you’ll owe taxes and probably a penalty.
More important, you’ll lose the future tax-favored growth that you might need in retirement. Instead, arrange a direct rollover into an IRA or your new employer’s plan.
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