Having access to a 401(k) plan means getting a solid opportunity to build a large nest egg for retirement. But if you're not careful about how you manage that plan, you could wind up missing out on the opportunity to really build wealth. Here are a few 401(k) mistakes you should make every effort to avoid in the new year.
1. Not claiming your employer match
Matching contributions are a huge perk associated with 401(k)s, and not capitalizing on your employer's generosity is a mistake that could really haunt you for years. When you fail to snag your match, you give up free money, as well as potential growth on that money.
Say your employer matches contributions of up to 5% of your salary and you earn $65,000 a year. This means that if you put $3,250 from your own salary into your 401(k), you'll get another $3,250 from your employer. If you don't collect that $3,250, you'll potentially lose more than just that sum, though, because if your 401(k)'s investments typically generate an average annual 7% return -- a reasonable assumption for a stock-focused strategy -- not having that additional $3,250 invested for 30 years means shorting yourself of almost $25,000 in missed growth. And that's more of a big deal.
2. Not paying attention to investment fees
The fees you pay on your 401(k)'s investments will dictate how much money you ultimately get to retire with -- and the lower those fees are, the more you stand to gain. Index funds typically charge much lower fees (known as expense ratios) than actively managed mutual funds, so if your 401(k) offers both choices with comparable performance, it could pay to stick mostly with index funds unless there's a compelling reason to do otherwise.
To be clear, sometimes actively managed mutual funds employ brilliant fund managers and are therefore worth the added fees. But if you're loading up on them in your 401(k), make sure there's a good reason -- namely, a track record of higher returns.
3. Not knowing the new annual contribution limits
The amount of money you're allowed to contribute to a 401(k) can change from year to year, and if you're in the habit of maxing out (which is a very good habit to uphold), keeping tabs on those annual thresholds is important. Currently, you can contribute up to $19,000 annually to a 401(k) if you're under 50 or up to $25,000 if you're 50 or older, thanks to a $6,000 catch-up provision. Beginning in 2020, these limits are increasing to $19,500 and $26,000, respectively, so if you're hoping to hit that max, make sure your payroll elections reflect that.
Keep in mind that 2020 is the first year in a long time in which the catch-up contribution for older workers -- currently set at $6,000 -- is going up. Starting in 2020, it will be set at $6,500.
Another thing you should know is that these limits reflect the amount you're allowed to contribute in a tax-advantaged fashion out of your earnings. Any matching dollars you receive from your employer don't count toward the annual limit.
4. Not saving more in 2020 than you did in 2019
Saving for retirement is kind of like training for an endurance event: Your goal should be to get better and better at it as you go. One way you can do so is to increase your savings rate from year to year, which is feasible in 2020 even if you're already maxing out, since the limits are increasing.
But let's be real -- most people don't max out their 401(k)s, and if you're nowhere close, your next best bet is to try to save more money in that account in 2020 than you did this year. A good way to go about that is to earmark your raise for savings (assuming you receive one). If so, just send those extra earnings directly into your 401(k) before that money gets added to your paycheck and you actually start to miss it. And if you're not getting a raise, try cutting back on one or two expenses in your budget to free up additional cash. An extra $40 or $50 a month could really go a long way.
You need a healthy amount of retirement savings to ensure that you're able to live comfortably once you stop working. Avoid these 401(k) mistakes next year, and you'll be one step closer to amassing a sizable amount of wealth for your senior years.