Planning for retirement is imperative when it comes to long-term financial security; yet, few Americans prepare themselves well. According to a study conducted by LIMRA, a trade association for the financial services industry, half of all working Americans are not saving for retirement. That’s right — zilch.
For those who are saving, 401k plans are the most common type of savings vehicle. Employers often match contributions, providing free money to their employees. What could be better, right?
Despite the obvious perks, think twice before resigning yourself to investment complacency. Like any other vehicle, 401ks come with their own list of risks. Read on to avoid the big ones. Your retirement planning is worth the added effort.
Not all 401ks are created equal. In fact, some charge exorbitant fees compared to similar options. “Explain to me (why) when people are putting their hard earned money into a 401(k), that they don’t read the fine print?” asks Jeff Rose, a Certified Financial Planner and founder of personal finance blog, Good Financial Cents. “I come across situations all the time where individuals don’t know where their money is going, how it’s invested, if there are any penalties if they wanted to take their money out, or if they left their job.” The bottom line: Don’t invest your money without gaining knowledge first. Read the fine print or meet with a professional to learn more about where your money is going and how you should manage it.
The average person doesn’t think about retirement every day. When work, family, errands, etc. are your current reality, it can be difficult to focus on the future. This is where investment complacency resides: Investments put on auto-pilot and left to climb or plummet without interference. Be warned, inaction is a recipe for disaster. The average retiree needs at least 80 percent of their last earning wage to live each year. This means that a retired man who last earned $100,000 a year will need roughly $1.6 million for 20 years of retirement. Allowing your investments to flounder today puts you at a greater risk tomorrow. Seniors living on credit cards and meager Social Security benefits understand the fear of dwindling bank accounts and impending credit repair. When it comes to retirement, time is your biggest asset. Schedule bi-annual progress meetings with your financial planner to ensure that your investments are well-managed.
· Portability problems.
Yet another reason to learn more about 401k options: portability concerns. The average person will work for several companies during their lifetime, change which requires diligence to protect your existing investments. Before investing in an employer-sponsored 401k, learn about the restrictions and penalties associated with rollovers. Some employers won’t allow you to take their matching funds with you. ”A common example would be if you’re putting in 6 percent of your salary, your company may match up to 3 percent, otherwise known as free money,” said Rose. “This is good unless you happen to leave your employer. Say you quit, find a better job, whatever, and the match that your employer provided has a vesting schedule, which could be translated as a surrender charge. Usually this vesting schedule will be anywhere from three-to-five years and if you leave prematurely, you forfeit what they put in.”
Don’t blindly jump into an employer plan without weighing it against the other options. If you wouldn’t risk your credit score today, why risk your stability in the future? Sign up for a savings plan that will follow you along the path to retirement. Don’t leave your savings behind.