The dream of every of employee is having a good life after retirement. Life after retirement can really be very tough if you fail to plan properly for it. The 401k plan is simply a contribution pension account that is provided by the employer and jointly funded with the employee. The essence of this contribution is to provide the employee funds after retirement. Poor decisions taken by employees can affect the growth of their 401k during their years of active service.
If you want to grow your 401k, avoid making the following mistakes:
1Sticking to a Default Contribution Percentage
Some employers automatically enroll their employees for 401k, while some employees are given the chance to make decisions regarding their enrollment. However, when you are enrolled automatically for your 401k, your default percentage contribution is 3.4%. This percentage may not be high enough to match your employer’s contribution. It means that the lower your percentage contribution, the lower the percentage contribution your employer is expected to make. You should at least try to increase your average percentage contribution to at least 5.1% so that your employer will be forced to match your contribution with an increase proportionate to yours. This increase in percentage contribution will make your 401k more valuable.
2Stinking to a Default fund Choice
When you are automatically enrolled for the 401k, there is a tendency for your employer to determine the type of fund your money is invested. Most times, this may not be favorable. Make sure you know the status of your default fund, if it is a stable value or money market fund. Once you have been able to ascertain the status of your default fund, you may switch fund. These default fund do not help your 401k grow, instead they keep it stable. Stock and bond index funds are much better to invest in.
3Putting too much money in your Company’s stock
Do not put too much money in your company’s stock, because you could lose your entire funds if the company folds up. Try to restrict the percentage invested in your company’s stock within 5% to 10%, and then diversify your money by investing in other profitable stocks.
4Borrowing from your 401K
There are so many risk involved in borrowing from your 401k. One of them is losing the ability to compound money for your retirement and the other is failing to pay back money borrowed. Should you leave your current job, you are expected to pay back the money borrowed within 60days. If you fail to pay within the stipulated period, you’d be fined, which is not good for your 401k.
5Cashing Out after Quitting Your Job
The penalties for cashing out is similar to borrowing. You’d be taxed as well as penalized for cashing out, and this is not good for the growth of your 401k. You’d also be losing out on the potential gains your money could have generated, and if you haven’t attained the mandatory age of retirement, 20% of your fund will be held by your employer for IRS.
In conclusion, you’d have to think of life after retirement be making any decision with regards to your 401k. If you plan effectively for your 401k, not only will it yield good value on your retirement but give you the good life you deserve after retirement.