5 Biggest
401k Mistakes
by Doug Fabian, editor
Maverick Advisor
Be
sure you're not compromising your financial future by falling
into these common traps.
When it comes to
securing a long and comfortable retirement, you can't get much
better than an employer-sponsored 401k plan.
With yearly contributions
of up to $10,500 and a range of investment options, you can amass
a sizable amount during your working career. And, it doesn't
have to end there. Roll the money over to an IRA when you retire
and while you can't add any more to the account you can still
keep the assets growing into the future, even with annual withdrawals.
So what's the problem?
In talking with investors
through the years, I've discovered that too many aren't properly
utilizing these vehicles. Through a combination of misunderstanding,
misinformation and just plain bad advice, a whole legion of employees
are compromising their financial futures by making one of five
common 401k mistakes.
Mistake #1: Not Investing In The Plan At All
It's
easy to get caught up in our day-to-day finances. There's rent
or mortgages, property taxes, car loans, children's activities
and schooling, groceries, utilities to name just a few. So when
a new employer asks if you want to contribute to a 401k, many
of us think that we can't afford to. Unfortunately, this shortsighted
decision can leave you working far longer than you intended.
Remember, starting
with a minimum contribution (even if it's as little as 1% of
your salary) is just that, a start. Once you see the value of
your account grow, it's easy to find more money from your paycheck
to add. (In addition, your 401k contributions are pre-tax, which
means less reportable income for the taxman to latch onto.)
Plus, if your employer
matches any amount of your contribution, you can't afford not
to contribute. Keep in mind that if your company puts in 50 cents
for every dollar you add, you receive an automatic 50% return
on your investment the best guarantee you'll ever find in the
financial industry.
Mistake #2. Taking 401k Loans
Just
because you can do something, should you? When it comes to taking
a 401k loan the answer's `no.'
I can't tell you how
many times I've talked to an investor who did just that to buy
a home. Oh, they had every intention of paying the money back,
but something always seemed to come up (one of home-ownership's
little ironies). They then ended up having to report the 401k
loan as income and pay taxes on it (on top of the 10% early withdrawal
penalty).
Emergencies are one
thing (although I recommend trying other loan sources before
touching your 401k). But if you anticipate needing a set amount
of money in the near future, save it up in a taxable account,
not your retirement plan. Besides the extra expenses, once that
money's gone, you lose not only it, but any future growth on
it as well.
Mistake #3. Overinvesting In Company Stock
I
don't care if you work for a startup Internet firm or a solid
blue-chip company, there's no reason to pin all of your financial
dreams on just one stock.
Keep in mind that you're
already exposed to the company's profitability through your salary
and/or bonuses. If the firm does well, you will too. However,
if the firm hits a rough patch, you could lose twice not only
with your job but by holding a large percentage of a declining
asset.
As always, portfolio
diversification is key. For this reason I don't recommend having
more than 10% of your total portfolio in company stock.
Mistake #4. Investing Too Conservatively
So
many investors are given the gift of tax-deferred growth in a
company-matched 401k with great investment options. Know what
they do then? They throw it away by keeping the money in money
markets, guaranteed investment contracts (GICs) or bond options.
Let me remind you that
this money is among your most important it's what you're going
to use to support yourself for as long as 30 years after you
retire. That's why you want to invest 100% of it in equity choices
following our Buy cycles. Consider that a $10,000 annual contribution
growing at 20% will be worth over $5.6 million in 25 years more
than enough for a comfortable lifestyle.
Mistake #5. Not Asking For More Options
This
is your retirement, your plan. Chances are if you're not entirely
happy with your 401k investment options (or lack thereof) neither
are your co-workers. Don't settle for mediocrity. Talk to the
plan administrator, your supervisor, the Chief Investment Officer
whoever you can and plead your case. The 401k market is very
competitive and there are multitude of plans that would love
your company's business.
Editor's Note: Doug
Fabian is editor of Maverick Advisor with Doug Fabian
the Monthly, 7811 Montrose Rd., Potomac, MD 20854, 1 year,
12 issues, $199. Visit the Web site at www.fabian.com.
