Common 401k Mistakes to Avoid
While a 401k account can be an incredible wealth-building tool, many investors make common 401k mistakes which cost the dearly over time. Don’t let these mistakes eat into your retirement benefits.
Editor’s Note: This is part six in our series on how to invest your 401(k) account. See also:
- How to Maximize Your 401k Plan
- Should You Actively Manage Your 401k?
- Harnessing the Power of 401k Dividend Stocks
- Discount Bonds Can Grow Your 401k Profits
- How to Generate Instant 401k Payments
- Three 401k Options To Consider When Switching Jobs
Three Popular 401k Mistakes
Here are three of the most common mistakes investors make with their 401k accounts.
Mistake #1: Not Maxing Out Employers Contribution Match
Your employer has likely agreed to match a portion of every contribution you make to your 401k account. If you’re not taking advantage of this extra compensation, you’re literally leaving money on the table.
Make sure that you know kind of matching program your employer offers, and then cash in on that benefit starting with your next paycheck.
Mistake #2: Letting Your 401k Account Sit Dormant
The beauty of a 401k account is that you can use it to generate wealth over time. Compound interest is a powerful thing. Einstein is reputed to have called it “the eighth wonder of the world.” But if you don’t invest your 401k account wisely, you’re passing up the power of compound interest.
For many investors, the idea of deciding how to invest your 401k is daunting. But it doesn’t have to be that much of a challenge. Whether you decide to actively manage your account, or invest your capital in mutual funds, make sure you don’t let fear cause you to miss out on investment returns.
Mistake #3: Investing in a Bond Mutual Fund
While I think some investors can make a case for investing in a stock mutual fund, bond funds are much different. Bond fund purchases can be extremely dangerous 401k mistakes to make.
Since bonds aren’t as liquid as stocks, it can be difficult for bond funds to buy or sell their positions. This doesn’t matter when markets are functioning normally. But when fear hits the bond market, these managers could be forced to sell positions at firesale prices.
As an investor in these funds, you’re likely to be hurt, even if you hold the fund until bond prices rebound. That’s why I believe you’re much better off buying individual bonds, instead of relying on a bond fund manager who may run into liquidity issues.
These common 401k mistakes can put a major dent in your future retirement wealth. But if you avoid these mistakes and invest wisely, your 401k could be a tremendous advantage, growing for years and providing the means for an enjoyable and financially independent retirement.