How We Mismanage Our Retirement
A 401(k) plan
is perhaps one of the best ways to prepare for retirement. Yet, many workers
make common mistakes that could cost them thousands of dollars that could
go toward a more comfortable retirement. Besides not participating at all,
here are ways you may mismanage your plan:
You don’t roll
your balance into another plan or an IRA when you switch employers.
Nearly 68 percent
of people who participated in a 401(k) plan took cash withdrawals from
their accounts when they changed jobs. You end up losing tax-deferred savings
if you don’t leave the money in the plan or roll the balance into a new
company’s plan or an IRA.
You borrow
from the plan.
You should
borrow money from your 401(k) only in an extreme emergency. Otherwise,
you’re simply drawing down the balance of the your retirement fund. The
money taken out isn’t growing, so you only reduce your retirement assets.
You play the
market.
Some plan participants
try to get the most growth out of their investments by switching from one
investment to another in reaction to marketplace changes. Known as market
timing, not even the pros can time the market with a consistent degree
of success. Remember that the 401(k) is a long-term investment, which means
you get the most from the plan when you’re consistent.
Younger participants
are too conservative.
If you have
more than 10 years to go before you retire, put a high proportion of your
investments in equities. You’ll get a larger return in stocks, and the
risk of loss in the equities market declines over time.
Older participants
don’t switch to more conservative investments.
If you’re within
10 years of retirement, you should protect your money by moving more investments
out of the stock market. A good rule is to calculate the amount of money
you’ll take from the plan for living expenses in the next five years and
keep that stash out of stocks.
You have too
much company stock.
It’s nice to
think that your employer will always be successful, but you could be risking
your retirement savings by thinking so.
Experts suggest
that you should have no more than 25 percent of your 401(k) assets in company
stock.
You don’t opt
out of the default election.
Most plans
have a default election, which is usually a superconservative choice like
a money market fund. If you don’t opt out of the default election, you
end up getting the lowest possible return on your investment.
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First Draft
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