3 Mistakes Investors Make with Their 401k Plans

Many investors make mistakes when investing in their 401k plans. When dealing with your retirement funds, you want to avoid as many mistakes as possible. Here are a few mistakes that investors make with their 401k plans.

1. Taking Too Much Risk

When dealing with money in your retirement account, you should stay away from investments that are too risky. Investors should not trade their retirement account funds as they would a regular investment account. There is nothing wrong with trying to get bigger gains by taking on risk in a normal investment account. However, this is the money that you will be living on some day. Therefore, you need to make sure that it is safe.

For example, many investors will try to invest in individual stocks with their retirement funds. Although you can get more capital appreciation this way, you could potentially lose your entire investment. In most cases, you will want to avoid investing in individual stocks with retirement funds.

2. Not Taking Advantage of Match

One of the biggest benefits that comes with investing in a 401k is the employer match. When you contribute money to your 401k, your employer as the opportunity to match what you put in. Each employer will contribute a different percentage based upon the rules that they set up. For example, an employer might provide a 50% match for up to 6% of your income. This means that if you contribute 6% of your paycheck, 9% of your income will actually be going into your retirement account. If you do not contribute the full 6% out of your paycheck, you are basically leaving free money on the table. When saving for retirement, most people do not have the luxury of ignoring free money. Employer matches can make a huge difference in how successful you are in saving for retirement. With this type of employer match, you would have a 50% return on your investment automatically.

3. Not Planning Contributions

Many people make the mistake of not planning how much they need to contribute to their retirement account in advance. They tend to haphazardly contribute to their retirement accounts when it is convenient for them. They do not know how much they need to save in order to successfully retire someday. You need to either sit down with your 401k advisor or utilize a 401k calculator to figure out what percentage you should be saving. With a 401k calculator, you can play with the numbers such as the amount of your contribution, the time that you plan on working, and the annual rate of return for your investments. Looking at all of these variables will help you come to decision about how much you should be saving out of each paycheck. Most people think that they have plenty of time to save for retirement. However, once you start playing with a 401k calculator, you will see that you might not have as much time as you think.

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