A 401(k) plan is a financially viable option for saving for retirement. But this is possible only if one knows how a 401(k) works. One must learn the fundamental aspects of a 401(k) and plan it properly. Besides, one must be sure they are making the right decision to maximize their long-term investment. Committing a mistake while investing may result in a longer time being spent to earn enough to afford retirement or consider downsizing.
Ignoring to take advantage of employer match programs
A lot of employers provide 401(k) matching programs. This is essentially free money. For instance, an employer matches 100% of an employee’s contribution to the 401(K) plan, up to 3% of the salary. So if the employee’s salary is around $75,000 and they contribute 3% of the salary to their 401(k) for the year, the 401(k) contribution will be around $2,250. Since the employer matches 100% of the contributions up to 3% of the employee’s salary, they will also contribute around $2,250 into the employee’s 401(k) for the year. Thus, around $4,500 will go into the 401(k). Not taking advantage of this means one is leaving money on the table.
Leaving the job before the account has been vested
When employers match the 401(k) contributions, there is usually a regulation that requires the employee to stay in the organization. This is known as the vesting period. Only after the vesting period is complete will the employee get to keep the entire amount of matched contributions. But if the employee leaves before the vesting period, they will lose the employer’s contribution, which can go up to thousands of dollars.
Deciding not to increase the contribution amount over time
Often, people set up their 401(k) and completely forget about it. This blunder must be avoided if one wishes to get the most out of their 401(K) plan. To do this, make sure to revisit the individual contribution to the plan every time there’s a raise in the income. Since most experts suggest investing and saving about 15% of one’s pre-tax income, increasing the contributions to 401(K) will also help meet this goal.
