The 401(k) is one of the most powerful retirement planning tools out there, but more than half (51%) of Americans are not currently contributing to one, according to research from Edward Jones.
If you're fortunate enough to have access to a 401(k) through your employer, it's wise to take full advantage of it. Even seemingly harmless mistakes could potentially cost you thousands of dollars, and these subtle blunders are some of the most dangerous.
Image source: Getty Images
1. Not contributing enough to earn the full employer match
Employer-matching contributions are essentially free money, so if you're not saving enough in your 401(k) to earn the full match, you're missing out.
Approximately 95% of 401(k) plans offer some type of employer contribution, according to a study from Vanguard. Furthermore, among the plans that offer matching contributions, the most common type of match is $0.50 for every dollar the participant contributes, up to 6% of their salary. So in this case if you have a salary of, say, $50,000 per year, you could be earning up to $1,500 per year in matching contributions from your employer.
If you're not taking full advantage of matching contributions, that could cost you in both the short-term and the long-term. Not only could you be missing out on free money right now, but when you're not contributing as much to your retirement fund each year, that also limits your long-term investment gains. Matching contributions can potentially double your retirement savings, so contributing just a little more to earn the full match could result in dramatic gains in the long run.
2. Not increasing your contribution rate over time
If you're saving consistently in your 401(k), that's a great start. But if you really want to supercharge your savings, it's important to gradually increase your contribution rate over time.
You don't necessarily need to boost your contributions substantially to see a major difference in your long-term savings. In fact, if you're 35 years old and earning $60,000 per year, you can potentially save nearly $85,500 more by age 67 if you increase your contribution rate by just 1%, according to research from Fidelity Investments.
Gradually increasing the amount you're saving is a painless way to dramatically boost your savings over time. If you're currently saving, say, 10% of your salary, try boosting it to 11% for a year. Then next year, try to bump it up to 12% or 13%, and so on. It may only amount to a few extra dollars per week, but over time you could save tens or even hundreds of thousands of dollars more.
3. Not considering how fees impact your investments
Whether you realize it or not, some of your 401(k) savings are going toward fees each year. The average 401(k) plan charges fees of around 1% of total assets under management, according to a report from the Center for American Progress. In other words, if you have $100,000 in your 401(k), $1,000 per year is going toward fees.
While 1% may not sound like a lot, it can add up over the years. In fact, the average worker paying 1% per year in retirement fund fees ends up paying more than $138,000 in fees alone over a lifetime, according to the Center for American Progress. If that same worker were to pay slightly higher fees of 1.3% per year, the lifetime fees jump to over $166,000.
If your 401(k) is charging higher-than-average fees, it may be worthwhile to consider investing in an IRA with lower fees instead. Check your plan statements or talk to your plan administrator to find out what kind of fees your 401(k) charges, then start browsing other types of retirement accounts to see whether you could find a better deal elsewhere. Keep in mind, however, that even if you end up switching to an IRA, it's still wise to save enough in your 401(k) to earn the full employer match -- since free money outweighs any fees.
Investing in a 401(k) is one of the best ways to save for retirement, but it's important to make sure you're taking full advantage of it. By understanding how your 401(k) works and doing your best to maximize your contributions, you can supercharge your retirement savings.
