If you're someone who's used to working hard and enjoying a decent standard of living because of that, then it's important to save for retirement. Without savings, you might struggle to cover your costs once your career comes to an end.
People who earn a typical wage can expect Social Security to replace about 40% of their pre-retirement paychecks. If the idea of a 60% pay cut in retirement sounds unpleasant to you, then it's important to save for your senior years as best as you can to supplement those monthly benefits.
Image source: Getty Images.
To that end, 401(k)s make things easy. With a 401(k), all you need to do is sign up, and your employer will deduct contributions from your paychecks automatically. It's a great way to stay on track and make sure you're funding a retirement plan consistently.
But if you're going to participate in a 401(k), it's important to avoid some of the pitfalls savers tend to fall into. Here are a few to keep on your radar.
1. Missing out on free money
It's common for employers that offer 401(k)s to also match worker contributions to some degree. But if you're not getting your full employer match, you're passing up free money.
And remember, any money your employer puts into your 401(k) is money you can then invest. So if you give a $3,000 match one year, you're not just losing $3,000 -- you're losing out on whatever that sum could've grown into.
Get the details on your workplace match if you're not sure how much money your employer will kick in toward your retirement savings. And then, if needed, make a few budget cuts to snag that match in full. You'll be thankful for the extra money once retirement rolls around.
2. Investing too conservatively
A dollar today won't have the same buying power in 20 or 30 years. That's why it's important to invest your 401(k) in a manner that's likely to outpace inflation. If you invest too conservatively, which is a common 401(k) trap, you risk ending up with a balance you aren't happy with.
Keep in mind that you may be investing conservatively through no fault of your own. If you have your 401(k) in a target date fund, you may not be getting the strongest returns due to the nature of how these funds tend to work.
If that's the case, take a look at the other investment choices your 401(k) offers. It could make more sense to put your money into some index funds that have the potential to generate higher returns for you.
3. Taking out loans against their balances
If you need to borrow money and your 401(k) permits loans, you may be inclined to take one out rather than borrow elsewhere. That way, any interest you have to pay goes back into your own account.
But while taking out a 401(k) loan might seem like a good idea, it can be very risky. If you don't repay your loan on time, it will be treated as a withdrawal. And if you're not yet 59 and 1/2, that withdrawal will generally be deemed an early one that incurs a 10% penalty.
4. Cashing out after leaving a job
It's natural to not want to leave money in a former employer's 401(k). But if you're leaving a job, whether by choice or not, one thing you shouldn't do is cash your 401(k) out.
As is the case with an unpaid loan, cashing out a 401(k) before turning 59 and 1/2 will leave you with an early withdrawal penalty. Plus, you'll lose out on the opportunity to keep that money invested for retirement.
A better bet? If you're leaving a job and don't have a new one lined up yet, roll your 401(k) into an IRA. And if you have a new job with a 401(k), you may be able to roll your old balance into your new employer's plan directly.
It's important to do your best to save well for retirement so you can enjoy your senior years to the fullest. But a big part of that means managing your 401(k) strategically -- and avoiding these potentially costly mistakes.
