Unlock Your Financial Future: Avoid These 401k Blunders!

Your 401k plan is one of the most powerful tools for building wealth. When you delay, that means you're delaying the magic of compound interest. Don't leave free money on the table. What I found was alarming: she had never allocated her contributions or the employer match. She missed a lot of upside potential. You may be tempted to take a distribution prematurely from your 401k. You could have a serious amount of penalty tax for the early withdrawal. You're also robbing your future self of valuable compounding growth.

Hey everyone, welcome to another edition of We're Talking Money. I'm Phil Clark, and today we're delving into a very serious topic: mistakes that people are making in their 401k plan. Your 401k plan is one of the most powerful tools for building wealth that will be used during retirement. You don't want to get this wrong; it can cost you in a major way.

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Mistake number one: it's not contributing enough, or maybe not contributing at all. I get it, it's tempting to put off saving for retirement, especially when you have other financial needs or wants. When you delay, that means you're delaying the magic of compound interest. So you want to save, and you want to save now, because your money has the opportunity to grow significantly over time.

Plus, many employers, they offer a match, and that means if you're putting money in the plan, they're matching your contribution. That's a big deal because it compounds as well, and that means your money is growing twice as fast.

One of our 401k clients spoke to me during a meeting and said, "I'm not going to add anything to the 401k because I'm probably going to retire in about 5 years." This person was making approximately $100,000 a year, and the employer gave a dollar-for-dollar match. That means if he put 5% into the plan, the employer gave him 5%. $100,000 salary means that his employer was willing to give him $5,000 every year. With the power of compounding interest and just a 7% rate of return year-over-year, in just five years he could have 50 or more thousand. That was free money.

Don't make the same mistake that this person was making. Be sure that if your employer is offering a match, you need to put money in the plan and get that match. Don't leave free money on the table.

Mistake number two is asset allocation, or perhaps the lack thereof. Some folks make the mistake of putting all their eggs in one basket, so to speak. Recently I spoke with a participant in one of our 401k plans. She asked about improving her rate of return. When we logged into her account to take a look at how she's investing, what I found was alarming: she had never allocated her contributions or the employer match. She was sitting in their stable value fund, which provided very little in the way of interest income or return. Instead, she should have been diversified.

I explained this to her, we quickly made some changes, and now she's in a much better place. But in the last several years, because the markets have been performing so well, she missed a lot of upside potential. She shortchanged herself in terms of retirement spending.

Investing in your 401k is important; asset allocation is just as important. You want to make sure that you're doing this, otherwise you can be vulnerable to market ups and downs, and that can be very, very costly when it comes to your long-term retirement success.

Mistake number three: it's failing to take advantage of Roth contributions. I'm sure you've heard that if you make a certain amount of money, you're prevented from contributing to a Roth. That's not true in the 401k. In fact, regardless of your income, anyone can contribute to a Roth 401k. Now, of course, this assumes that your employer offers this feature, and if they don't, I would encourage you to bother them until they do. Remember, Roth contributions are after tax, but growth and distribution for the rest of your life will never be taxed.

And finally, mistake number four: borrowing or making early withdrawals from your 401k. I get it, life happens. There are plenty of times that you may be tempted to take a distribution prematurely from your 401k. You could have a serious amount of penalty tax for the early withdrawal, and you're going to pay ordinary income tax on that same withdrawal. You're also robbing your future self of valuable compounding growth.

Recently one of our clients made the decision to take a withdrawal, and a sizable withdrawal at that, from her IRA, and this is for the purpose of finishing a down payment on a new home. She's going to face some significant penalties and income tax, which means she has to take even more money from her IRA account. This is taking away valuable growth and income potential as she reaches retirement. A better idea for her is finding a more affordable home. Do yourself a favor: think long and hard before prematurely withdrawing from your retirement funds.

I hope this episode of We're Talking Money has inspired you to maximize your 401k plan and avoid these costly mistakes that can very quickly disrupt a secure retirement. Remember, your 401k plan, or any retirement plan for that matter, are powerful tools, but it's up to you to use them wisely.

Don't forget: subscribe to our channel, give us a thumbs up if you like today's episode, and keep watching. We're bringing out new episodes every week with one goal in mind, and that's helping you make better financial decisions. I'll see you next time on We're Talking Money.