Though not everyone has access to a 401(k) plan through work, those who do have a prime opportunity to sock away funds for retirement. That's because 401(k)s offer much higher annual contribution limits than IRAs.
But if you mismanage your 401(k), you could end up falling short during your senior years. Here are a few big mistakes you should aim to avoid in the course of the new year.
1. Not contributing enough to snag your employer match
Many companies that sponsor 401(k)s also match employee contributions to varying degrees. Be sure to find out what your company match looks like so you can claim it in full. If you don't, you'll effectively be passing up free money.
One thing you should know is that due to the coronavirus pandemic, some companies have cut back on 401(k) matching or stopped the practice altogether. But that doesn't mean your match won't be reinstated at some point in 2021, so keep tabs on where things stand and consult your benefits department if you're ever unsure.
2. Not boosting your savings rate
If your income has taken a hit during the pandemic, you may not be in a position to fund a 401(k) next year. And if that's the case, don't stress out. Rather, focus on your immediate needs and financial recovery. But if your income hasn't been impacted at all by the ongoing crisis and you're, in fact, getting a raise in the new year, then it pays to try to save more in your 401(k) in 2021 than you did in 2020.
A good bet in this regard is to just save your entire raise in addition to whatever you were saving before. Since it's not money you're used to living on, you shouldn't have a problem allocating it to your retirement plan.
3. Not paying attention to your investments
Many people sign up for a 401(k), and in the absence of choosing investments, wind up in their plan's default option, which is generally a target-date fund. These funds aren't terrible per se, but they're also not perfect. For one thing, they tend to charge hefty fees and often invest too conservatively, leaving savers like you to miss out on potential growth.
If you can't remember the last time you checked up on your 401(k) investments, be sure to do so at some point next year. And if your money is in a target-date fund, consider choosing alternatives that could better align with your risk tolerance, age, and goals.
That said, pay attention to the fees each investment choice will charge you. As a general rule, you'll pay far less for index funds, which are passively managed, than you will for actively managed mutual funds, but there's a good chance you'll enjoy comparable, if not superior, performance.
The more money you manage to save for retirement, the more likely you are to enjoy your senior years. Be sure to avoid these 401(k) mistakes -- both in 2021 and in future years, as well.