If we work for somebody else, most of us have a 401(k). After all, it is a pretty popular type of retirement plan. But do you know if you are making some mistakes that may cost your 401(k) balance its investment soul?
Here are the Sins of 401(k) investors:
The Sin of Missing Out on The Match
So many participants in 401(k) retirement plans don’t contribute enough to retire. It’s a real sin when you don’t contribute to get the maximum matching contribution from your employer. This is just plain dumb. You are missing out on free money.
Look at it this way. If it is a 50 cent match on every dollar up to 6%. That means that your investment gets a 50% return! Or, you could lose 50% and still break even. I know you don’t want to lose anything, right?
The Sin of Market Timing
Everyone knows it’s a fools game to try to time the market. Well, apparently not everyone knows this rule. Your putting your 401(k) retirement savings at eternal risk when you try to jump in and out during every bull and bear market. Have the fortitude to pick something and stick with it. You’ll be better off riding the ups and downs than trying to second guess every market hiccup.
Bigger sin…how do you know when to get back in? The problem with this theory is that you will probably lose out on significant gains as you ponder whether to put your investments to work.
The Sin of Not Contributing Enough
It’s no secret that the savings rate in the U.S. is pitifully low. If you think you’re not contributing enough, then look into some online calculators or mutual fund sites to see how far behind you may be. A good financial advisor should be able to do this calculation for you too.
Use my favorite technique and raise your contribution level 1% every six months. This way you increase your savings rate at a gradual pace. Don’t put your check in financial shock by making a huge increase all at once.
The Sin of Not Seeking Advice
Don’t commit the sin of picking investments in your 401(k) without guidanceYour plan advisor is an invaluable resource. Many of these advisor have financial planning certifications and can help you plan for your retirement. It’s just a sin to not take advantage of a free service.
At best, you’ll be throwing darts blindfolded by going it alone. Try to find out an optimal contribution level and appropriate asset allocation for your risk tolerance.
I see these mistakes over and over again with 401(k) participants. Take my advice, consult with a good financial advisor, develop a portfolio and stick with it, and make sure you are at least getting all the match.
Are you committing the SIns of 401(k) Investors? If you want forgiveness of your 401(k) sins, shoot me an email at firstname.lastname@example.org, or call me for confession at (859) 225-2596. Don’t forget to subscribe to The Diligent Advisor to get automatic updates via email!