3 401(k) Mistakes You Should Correct Before 2023
Setting aside any money in your 401(k) this year is an accomplishment, given the record inflation we’ve all been struggling with. But just because you saved something doesn’t mean your nest egg is optimized for growth.
If your goal is to retire comfortably, you need to avoid the following three 401(k) mistakes. Fortunately, there’s still time to correct them before we ring in 2023.
1. Leaving your 401(k) match on the table
You must claim your 2022 401(k) match, assuming your company offers one, by Dec. 31. Unlike IRAs, 401(k)s don’t enable you to make prior-year contributions, so if you miss your chance this year, you lose that money forever.
Check with your company’s HR department or your 401(k) plan administrator to learn how much you’ve already contributed this year and how much more, if any, you need to set aside to claim the full match. Divide the remaining amount by the number of pay periods left in the year to figure out how much you need to set aside per paycheck to get the full match.
Strive to get as much as you can this year, and begin making 2023 contributions right away in January so you can easily scoop up next year’s match.
2. Investing in expensive mutual funds
Your employer picks a variety of investments to offer through the 401(k), but you have the final say on which of these you invest in. Many companies offer mutual funds, which are bundles of stocks you purchase together.
This helps diversify your savings, but it can come at a high cost. Mutual funds have expense ratios, or annual fees that all shareholders pay to the fund managers. They’re usually listed as a percentage of your assets. For example, a 1% expense ratio means you pay $1 for every $100 you have in the fund each year. You should avoid paying a higher fee than this whenever possible, as large expense ratios can eat into your profits over time.
You can learn what your expense ratio for your current fund is by checking your prospectus. Compare this to some of the other investments available to you through your 401(k) to see if you can find a more affordable option that suits you.
Sometimes this isn’t possible, though. If your employer doesn’t offer any affordable investments, you could request it adds some other options. Or you could put your money here just until you get your 401(k) match, then switch to an IRA. IRAs give you a lot more freedom to invest your money how you want, but you’re limited to just $6,000 in contributions for 2022 ($7,000 if you’re 50 or older) compared to $20,500 for 401(k)s ($27,000 for adults 50 and older). Next year, you’ll be able to set aside more, though.
3. Sticking with the default savings rate
Some companies automatically enroll their employees in their 401(k) plan and set a default savings rate that’s withheld from each paycheck until the employee sets their own rate. The default savings rate may only be a small percentage of your income, and while that’s better than nothing, it may not be enough to help you achieve a comfortable retirement.
Take some time to figure out how much you actually need for retirement, if you haven’t already done so. Use this information to help you decide how much to withhold from each paycheck. Generally, it’s a good idea to save at least 10% of your paychecks for retirement, and some people save 15% or more. Keep in mind, if you qualify for an employer match, this will reduce the amount you personally need to contribute for retirement.
If you aren’t able to contribute as much as you’d like right now, just set aside as much as you’re able to, and try to boost your contributions by 1% of your paycheck per year until you get to a savings goal you’re comfortable with. Be prepared to set aside even more money in the future, though, to make up for your smaller contributions today.
These steps shouldn’t take you too long. Find some time to review the information above and make changes to your 401(k) investment strategy before the end of the year. Then, conduct a similar review around this time next year and every year thereafter to make sure you’re doing all you can to maximize your 401(k)’s growth.
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