How to make the most of your 401(k)

Most people who start saving for retirement expect things to go well.

However, a number of wrong turns can make it hard for your nest egg to grow.

Recent research at Boston College found that a 25-year-old with a median income who contributed regularly to his or her 401(k) account starting in 1981 — when the plans first took off — would have accumulated around $360,000 by age 60. Yet the typical 60-year-old has under $100,000 saved.

Here are some of the mistakes people make along their savings journey and tips on how to avoid them.

Missing out on the employer match

If your company offers a 401(k) plan, it may also offer a 401(k) match.

The average employer 401(k) match reached 4.7% this year, according to Fidelity, which manages more than 30 million retirement accounts.

Yet more than a third of workers contribute below the match rate, “leaving money on the table,” said Anqi Angie Chen, assistant director of savings research at the Center for Retirement Research at Boston College.

Try to gradually increase your savings as time goes on, particularly if you get a raise, Chen said.

“Many plans allow auto escalation, which means your contribution amount will be increased by 1% or so every year,” said Arielle O’Shea, a retirement and investing expert at personal finance website NerdWallet. “Opt into that – you might find you don’t miss the money.”

Failing to regularly contribute

Skipping just a few years of contributions to your 401(k) can significantly reduce the amount you retire with, said Katie Pehrson, senior wealth planner for Wells Fargo Private Bank.

For example: If a 35-year-old saves $19,000 a year — the current annual limit for savers under 50 — until age 65, they’ll end up with $1.34 million. (That assumes an annual return of 5%.)

But if the person missed just three years of contributions — at 44, 54 and 64 — they’d have a balance closer to $1.24 million, according to Pehrson.

“Just missing contributions of $57,000 can have a $100,000 impact in the long run,” she said. (That’s, of course, because of losing out on compound interest.)

It’s important to make saving a habit, O’Shea said.

If you’re between jobs and can’t make 401(k) contributions, try to continue to set aside some money in an individual retirement account, she said.

“Even if you contribute $10 or $20 a month, it keeps your savings momentum going,” she said.

Dipping into your account

People often cash out their 401(k)s when they leave a job or need money to pay a debt or unexpected expense, O’Shea said.

“If you do, you’ll owe taxes and penalties that can wipe out a fourth of your balance,” she said.

To avoid this hit to your retirement savings, work to build up a healthy emergency savings fund. It’s better to stop or scale back your 401(k) contributions for a period than to dip into the plan early, O’Shea said.

Even a loan from your plan is typically better than an early withdrawal, O’Shea said. Keep in mind: You’ll need to repay the loan within a certain period or risk the IRS treating it as an early withdrawal.

“Dipping into qualified retirement savings is generally a last resort,” Pehrson said.

Low returns

Fees on your 401(k) can add up to over $200,000 over a lifetime, according to NerdWallet.

“Anything you pay to fees, no matter how small, eats into your returns because that fee is money that wasn’t invested,” O’Shea said. Experts generally say any fees above 1% are a “ripoff.”

One study found that in 16% of 3,500 plans analyzed, fees were so high that they “consume the tax benefits of investing in a 401(k) for a young employee.”

If you have a particularly expensive 401(k), you may want to contribute enough to get your full employer match, but save any other money in an individual retirement account, “where you’ll have a much larger investment selection so you can seek out low-fee funds,” O’Shea said.

And make sure you take a careful look at the investment options for your 401(k). Sometimes the default option “may not be the best option for you,” O’Shea said.

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