It was not long ago that American workers counted on the “gold watch” and the company pension plan to reward them for a lifetime of service and provide for their “Golden Years.” Times have changed. Workers today change companies often, and corporations have slashed worker’s benefits. The 401(k), once a “supplement” to the company pension plan is now the primary retirement tool for most workers. Unfortunately, that means the burden is on us to save and invest wisely in our 401(k) plans—yet most of us are ill prepared for that responsibility.
It’s time to take a fresh look at your plan. Let’s start by taking a look at 5 common mistakes to avoid.
Not Taking Full Advantage of the Company Match
A study conducted by AON Hewitt recently provided some bleak statistics about employees taking advantage of the employer match. “Many workers still aren’t contributing enough to their 401(k) plan to receive matching employer contributions. Overall, nearly three in ten (29.4 percent) of plan participants contributed below the company match threshold.” If you are lucky enough to have an employer match in your 401(k) plan, then take advantage of it. The employer match is “free money”, providing a 100% return for every dollar that you contribute.
Not Adjusting to Higher Contribution Limits
Did you know that contribution limits for 401(k) plans have increased over the last several years? If you weren’t aware of that fact, you are not alone. Most employees don’t spend their free time staying on top of tax law changes. While not everyone has the ability to save the maximum amount in their 401(k) plans, many people fail to hit the maximum contribution limits simply because they are unaware of what those limits are. A good practice is to review tax changes that will go into effect for the next calendar year every December and make adjustments to savings rates to account for these changes.
Avoiding the Roth 401(k) Option
Traditional 401(k) contributions are made on a pre-tax basis in exchange for taxable withdrawals in retirement. The old logic was that your retirement tax rate will be lower and you will gain a tax advantage on those dollars when you withdraw them. However, given the fiscal situation in the U.S., it’s possible that tax rates could increase across the board, resulting in a higher tax bracket for those in retirement.
Moreover, because so many dollars have flowed into pre-tax savings plans, many retirees may be pushed into equal or higher tax brackets in retirement. So, if you have the Roth 401(k) option in your plan, it’s worth investigating. You pay tax today, but withdraws in retirement are tax free (similar to a Roth IRA). This may be a great option if you have not hit your prime earnings years. Young savers in low current brackets are wise to consider this option.
Excessive Trading and Speculating
Many investors believe in building their retirement nest egg by chasing after “hot sectors” or shifting from stocks to bonds based upon advice from CNBC “experts.” Low trading costs and zero tax consequences make this strategy seem sound. Wrong! Frequently churning your retirement portfolio courts excessive risk, such as moving to cash at the wrong time and trying to time when to get back into the market (you need to time both moves correctly). A balanced asset allocation that takes your risk tolerance and goals into account, coupled with a buy-and-hold approach, is the way to go.
Not Updating Beneficiaries after a Significant Life Event
Significant life events can be a tumultuous time–such as a death in the family, divorce or a remarriage. When the dust settles, it’s important to review and update the beneficiary designations of your 401(k). Even if you remember to update your estate plan–such as wills and trusts–you must also follow through and update your beneficiary designations as well. Do not assume that your estate plan, even an updated one, will take care of it all. Most people are surprised to learn that beneficiary designations always trump what is laid out in a will.
Finally, don’t forget about plan B. In addition to naming primary beneficiaries, it’s important to also name secondary beneficiaries. As with most areas of finance, a routine and regular review can save you and your loved ones a big headache down the road.
For more information or to set up a consultation, contact Pathway Financial Planning at 248-567-2160 or email firstname.lastname@example.org.