3 Common 401(k) Investing Mistakes Most People Make and How to Avoid Them for Stronger, More Reliable Retirement Savings

Discover how to optimize your 401(k) contributions and avoid costly errors that could hinder your retirement plans.

Understanding Your 401(k)'s Full Potential

What’s this about? This newsletter will explore the four most common mistakes people make with their 401(k) investments. Why should you care? Because the decisions you make today about your 401(k) can significantly impact your financial security in the future. What question needs answering? How can you maximize your 401(k) to ensure a comfortable retirement? I promise to unveil strategies that will not only help you avoid common pitfalls but also enhance your retirement savings significantly.

A Brief History of 401(k) Mistakes

Since its inception in the 1980s, the 401(k) plan has become a cornerstone of American retirement planning, yet many participants still fall into the same traps. Imagine this: hard-working individuals, just like yourself, losing out on thousands, if not hundreds of thousands, of dollars from their retirement funds simply because they weren’t aware of or didn’t understand how to manage their 401(k) effectively.

What You Might Be Getting Wrong

Now, you're probably thinking, "Am I making any of these critical errors?" Here's the thing about this answer: it's crucial to identify and rectify these errors not just for peace of mind but because they can have a dramatic effect on your retirement savings. Let's talk about why this is important: each mistake you correct can potentially add years to your retirement comfort. The common mistakes include:

1. Not contributing enough to receive the full employer match
2. Not Knowing What You’re Invested In
3. Overinvesting in your 401K and ignoring other options

Let’s break down each of these errors and show you how to fix them.

Not Contributing Enough to Get the Full Employer Match

Many people make the mistake of not contributing enough to get the full employer match.

Most employers offer a 401K or retirement savings plan of some sort and many offer matching contributions up to a certain percentage. This means that for every dollar you save, your employer will deposit an additional dollar on your behalf. For instance, if your employer matches up to 4% of your salary and you make $100K annually, then they will match up to $4,000 in saving for a total of $8,000.

It’s like getting a 100% return on your money instantly.

Ensure you contribute at least enough to capture all matching funds.

Not Knowing What You’re Invested In

Using the default investment options can have disastrous effects on the performance of your investments. You should avoid putting all your eggs in one basket, especially if that basket is your company’s stock.

Consider diversifying your investments, especially if you are new to investing. Having all your eggs in one basket like company stock opens you up to unnecessary risk. For example, the average stock falls 2-3X the market averages. This means that if the S&P goes down by 1%, then your stock goes down 2-3%. What happens when the market corrects 20-30%? The value of your company stock could get cut in half.

Here’s an example of what happened to a friend’s company stock during the 2022 bear market.

Charter Communications (CTHR) lost 63% of its value in less than a year 2021-22.

Additionally, investing in the default options could put your money in investments with higher expense ratios and lower performance. This 2055 target day fund for instance has an expense ratio of 0.08% (4x the cost of the Index Fund below) and underperforms.

Why would you pay more for less?

A simple way to avoid this is to invest in low-cost index funds or ETF’s.

Index funds that track the S&P 500 like this one from my own 401K carry expense ratios as low as 0.02%, the S&P historically returns 10% annually (not accounting for inflation) and since you're investing in the entire S&P 500, you are automatically diversified across 500 stocks.

Overinvesting in Your 401K While Ignoring Other Options

401(k)s are powerful tools, but over-investing in them can limit your investment flexibility.

401K options are limited to the selection provided by the administrator, there’s little opportunity to increase performance, and its less tax advantaged than other options like the ROTH IRA.

Most likely you will be limited to time-date funds and mutual funds that typically underperform the S&P 500 and usually come with higher fees.

Performance is capped due admirative restrictions that prevent you from implementing systems or buying assets that boost performance.

And why not invest in as much as you can in a Roth IRA that will save you nearly 95% in tax burden. Check out my YouTube Video for more on this.

Consider balancing your retirement strategy with traditional or Roth IRAs, which often offer broader investment choices and unique tax benefits.

Invest in your 401K up to the match and then proceed to max out your Roth IRA.

What does this mean for you?

By avoiding these four pitfalls, you can take control of your financial destiny and potentially boost your overall retirement savings balance substantially. How is this important? It empowers you to make informed decisions that align with your personal retirement goals, differing from the one-size-fits-all advice often seen.

To recap:

• Contribute enough to get the full employer match for free money.
• Review what you're invested in to understand fees and returns.
• Invest in Index Funds or ETFs to reduce single stock risk and maximize returns.
• Explore Roth IRAs for better investment options and tax benefits.

Maximizing your 401(k) requires proactive decisions, but taking the time to correct these mistakes now can significantly boost your retirement security.

As always, thanks for reading.

Hit reply and let me know what you found most helpful this week—I’d love to hear from you!

See you next Saturday,

Justin Saffel - The Creative Investor