Saving for retirement in a 401(k) is one of the smartest moves you can make. That’s because Social Security most likely won’t provide enough income for you to live on.
The monthly benefit you collect from Social Security will probably replace about 40% of your former paycheck, assuming you’re an average earner. But chances are, you’ll need a lot more money than that to keep up with your bills as a retiree, and also, enjoy the freedom that comes with not having a job to report to.
But while socking funds away in a 401(k) plan is a great way to accumulate wealth for your future, you may find that you’re not seeing the amount of growth in your retirement account that you’d like. If that’s the case, these could be some of the reasons why.
1. You’re not snagging your full employer match
Many employers that sponsor 401(k) plans also match worker contributions to some degree. But if you’re not putting in enough money to snag your match, then you’re not only leaving free cash on the table, but also, setting your 401(k) up to potentially fall short.
Imagine you pass up $1,200 a year in free 401(k) dollars by not claiming your full employer match. Let’s also imagine you do this over a 30-year period. For a 401(k) plan invested at an average annual 7% return, you’re talking about missing out on $113,000 when you factor in not just that lost money, but a lost opportunity to invest it.
2. You’re investing too safely
Many people worry about investing in the stock market because it’s known to be volatile. But if you load up on bonds in your 401(k) rather than stocks, you may end up very disappointed in the extent to which your savings are able to grow.
The 7% return we used in the example above is a bit below the stock market’s average. Now, say you sock away $500 a month in your 401(k) over 30 years at an average annual 7% return. You’ll end up with about $567,000, which is a decent-sized nest egg.
If you play it too safe and stick with bonds, you might average a 4% annual return instead. That would leave you with about $337,000 in retirement. That’s not a negligible sum, but it also gives you a lot less buying power than $567,000.
3. You’re losing money to fees
Not all 401(k) funds are created equal when it comes to the fees you’ll pay to invest in them. Actively managed mutual funds employ people to hand-pick investments. And so if you load up on them, you’ll be charged hefty fees to help pay their salaries.
Index funds, by contrast, are passively managed. All they aim to do is match the performance of the different benchmarks they’re tied to. As such, the fees you’re charged to invest in index funds are generally minimal, and much lower than what actively managed mutual funds will charge.
Most 401(k) plans offer a mix of actively managed funds and index funds for enrollees to choose from. If you’ve been paying expensive fees, it may be time to change things up so you don’t lose out on money needlessly — especially since many index funds perform just as well as their actively managed counterparts, if not better.
Don’t sell yourself short
Once you retire, you may become quite reliant on the money in your 401(k). So don’t limit yourself to a smaller balance. Instead, make sure to claim your full employer match every year, invest in a reasonably aggressive fashion (at least while retirement is still many years away), and avoid losing money to fees when there’s an alternate option.
The $16,728 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.