2017-06-15 / The Motley Fool

Fool’s School

401(k) Blunders to Avoid

For many of us, 401(k) accounts are vital tools for retirement savings. Maximize their effectiveness by avoiding these mistakes:

1. Not contributing enough in order to grab all available employer matching dollars: It’s common for employers to match a certain percentage of your contributions — that’s free money, so don’t pass it up.

2. Not socking away money aggressively for retirement: The more you invest and the longer those dollars have to grow, the bigger the nest egg you’ll likely have. Contribution limits for 401(k)s are generous — for 2017, they’re $18,000, plus an additional $6,000 for those 50 and up.

3. Leaving a default setting in place: Default settings will generally invest your money conservatively. This is especially ill-advised for young workers, and it can doom you to low returns. Over long periods, stocks are likely to outperform bonds and other “safer” alternatives. You can do well over time with a low-cost broadmarket index fund, such as one based on the S&P 500 or the total stock market. If your plan doesn’t offer one, ask about it.

4. Holding too much of your employer’s stock: Relying on one company for your current income as well as your future financial well-being is keeping too many eggs in one basket. Even well-respected companies can do poorly. Diversify.

5. Borrowing from your 401(k): Even in an emergency, try to find your needed money elsewhere. Taking dollars out of your 401(k) removes their ability to grow for you — possibly for years or forever.

6. Cashing out when you change jobs: Even if you have only, say, $25,000 in your account, if you leave it to grow for the next 20 years and it does so at an annual average rate of 8 percent, it will become $116,500, a useful sum in retirement. You might roll over your 401(k) into an IRA when changing jobs.

For most of us, the worst 401(k) mistake to make is to not participate in a 401(k) plan. Learn more at fool.com/ retirement and brightscope.com. ¦

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