These 3 Tragically Obvious Mistakes Will Kill Your 401(k)| personal financing

(Dave Kovalsky)

Have you reviewed your 401(k) recently? If you haven’t, this is probably a good thing, as you may not like what you see. I have definitely avoided checking my retirement accounts for the past few months. The Standard & Poor’s 500 It’s down 19% year-to-date as of May 20, and Nasdaq Composite Lost 28% – this is close to bearish market territory or in bearish territory, depending on the indicator you are tracking.

While it’s hard to see the red numbers seemingly every day, it’s important to keep in mind that bull markets usually last longer than bear markets, and focusing on the longer term is the best strategy for making gains. Avoiding these three common mistakes will help you get the most out of your 401(k).

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Mistake #1: Not getting a perfect match with the company

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This sounds like a no-brainer, but you might be surprised how many people don’t get the full company match on their 401(k) plan. A 2015 study by Financial Engines found that 25% of plan participants don’t get the full game for the company, leaving a total of $24 billion on the table. Those earning $40,000 or less (42%) and under 30 (30%) were more likely to not get the full match.

While not all companies offer a match, many employers typically match anywhere from 2% to 6% of an employee’s salary as contributions to their 401(k). So if your company matches 4% of your annual salary, and you only contribute 2% to your plan, you lose out on free money.

Let’s say you earn $50,000 annually and contribute 2% of your salary to your plan – that’s $1,000. If it’s a dollar-for-dollar match (some companies offer partial matching), the employer will also contribute $1,000, so you’ll have $2,000 invested in your wallet. But if you make the full 4%, you will receive $2,000 from your employer.

Now, let’s see how much you’ve missed over time. If you are 30 years old and contribute 2% of your salary for the 32 years until retirement, have a 3% annual increase, earn an average annual return of 10%, and receive a matching contribution of $1,000 from your employer each year, You would have about $558,000 by age 62. If you contributed 4% and got a full 4% match for the company, you would have $1.1 million at the same age.

Mistake 2: Waiting Too Long for an Investment

When you’re out of high school or college and you land your first full-time job in your field, you’re probably not thinking about retirement. Alternatively, with an entry-level salary, you might feel like you need every red cent to cover expenses here and now. It’s not uncommon for people in their 20s to skip investing in a 401(k) for a while. A Morning Consult survey a few years ago said only 39% of people in their 20s invested for retirement, while a survey from Nationwide said the average age at which Americans begin investing in their retirement is 31.

Just as not getting a perfect match with the company will cost you hundreds of thousands of dollars over time, you can also start too late to invest in your 401(k). Let’s do the math. In the hypothetical situation above, the person started contributing to their 401(k) at 30, which is roughly average. But let’s say you started at the age of 25. What difference would those five years make?

Well, your salary will probably be lower, so let’s make up the numbers based on a salary of $45,000, with a 3% annual increase. Let’s also say you contribute 4% and get a perfect match for the company with an average annual return of 10%. Like the above scenario, you retire at age 62. You’ll have roughly $1.7 million after 37 years — about $600,000 more than if you waited to start at age 30.

Mistake #3: Not paying attention to fees and diversification

Every investment in a 401(k) comes with fees — some more than others. There are two things to check. One is if the fund imposes a load – or commission – on the investment or sale. This is usually a one-time fee collected when the fund is bought or sold. Ideally, you want a chest with no load. The other is the expense ratio. This is an annual fee that is charged to cover operating costs, which come from your return on investment. Index funds have lower expense ratios with some as low as 0.02%. This means that you only pay $2 per year in fees for every $10,000 invested.

Index funds and exchange-traded funds (ETFs) typically have lower expense ratios, because they are passively managed and generate returns based on indexes. Actively managed funds, led by a portfolio manager, are usually more expensive with fees typically ranging from 0.50% to 1.50% – or higher. A fund with an expense ratio of 1.00%, for example, will take $100 of your returns each year for every $10,000 invested.

During the long bull market of the 2000s, people flocked to index funds and ETFs, because indices were flying high, and these funds had low fees. When indices drop, actively managed funds may do better if they beat their standards and justify those higher fees.

Finally, there are several good resources from The Fool that delve into how to diversify your portfolio and allocate assets to get the best returns in the long run. As a general rule, the further away from retirement, the more aggressive your wallet should be because you have more time to bounce back from fainting like we’re seeing now. As you approach retirement age, you may want to gradually become more conservative to reduce the impact of volatility.

But avoid the temptation to push back in the short-term trade and panic, because when you do, you are not only capturing losses; You lose returns when the market inevitably bounces back.

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