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Seven 401k Mistakes (401k Investing for Beginners)

Aurra one case can be a financial

blessing to many family often though it

gets people to start investing and lieu

of any other type of retirement strategy

it's much easier to use a matching 401k

plan offered through your employer and

to open your own account elsewhere and

begin investing

however contributing money to a 401k for

years doesn't necessarily guarantee a

prosperous life during retirement

surprisingly the average for when k

balance is just slightly over $100,000

which is just a fraction of what most

people need to retire the AARP estimates

that around 1.2 million is needed to

provide an income of $40,000 for 30 or

so years why aren't people setting aside

more money for their retirement there's

much more involved to ensuring a secure

retirement than just signing up for a

savings plan most people aren't

knowledgeable on both the many ways to

prepare correctly for retirement with

the 401k to help here's a list of the

most prominent mistakes that could be

costing you your retirement

my name is Chris and I'm here to teach

people about money personal finance and

investing if you're interested in

improving your financial future make

sure to subscribe to the channel and hit

the like button if this video is helpful

mistake number one not taking advantage

of a company MACT the best thing that a

401k plan can offer is the employer

matching contribution this is basically

a bonus that your company kicks in when

you contribute to your retirement

account which is usually based on a

certain percentage of your pay if your

company contributes up to six percent of

your salary make sure you're

contributing at least six percent to

take advantage of that entire map

otherwise it's simply money of your

employer's pocketing and not paying you

these matches can double your retirement

savings in some cases but like anything

there is a catch and that's what's

called vesting rules vary but might

state the own zero percent of the

company's contributions during your

first year of employment fifty percent

after two years seventy-five percent

after three years in a hundred percent

of your match after four years this

means that if you leave the company

after just one year none of those

matching contributions will be yours if

you're considering finding a new job you

might want to make sure you're fully

vested you might decide you have to

stick around at a less desirable job for

a few more years to receive that money

mistake number two cashing out when you

change jobs

if for some reason you find yourself

changing jobs do not cash out your 401k

this could result in hefty penalties due

to age restrictions in addition to large

tax implications some funds allow you to

leave money with your former employer

but many don't if you're required to

move the money do a rollover into an IRA

or into your new employers 401k plan if

possible

in a direct rollover the funds are moved

right into the new account leaving

little chance for you to spend the money

mistake number three not increasing

contributions over time 401k

contributions are more often than not

based on a percentage ER salary so if

you contribute 6% year 401k the

contributions will rise in line with any

increase in pay but if you want to get

even further ahead financially creating

the possibility of reaching financial

freedom sooner you want to boost those

contributions more than that say you

make seventy five thousand dollars a

year and contribute six percent or forty

five hundred dollars to your retirement

plan if you get a five percent raise

your salary goes up to seventy eight

thousand seven hundred and fifty dollars

and that increases your 6% 401k

contribution the four thousand seven

hundred and twenty-five dollars you are

now making three thousand seven hundred

and fifty dollars more but your annual

contribution only went up by two hundred

and twenty-five dollars your cost of

living doesn't change the day you get a

raise in this scenario you could afford

to increase your annual contribution to

ten percent which would be seven

thousand five hundred dollars annually

it might be tempting to grab that

immediate gratification but investing in

your retirement instead will bring

greater rewards mistake number four

being oblivious to investment

performance at some point you decided

how to invest the money in your 401k

usually when the account was opened the

options are probably provided based on a

varying level of risk if you haven't

been paying attention to how those

investments have been performing

compared to the overall market start

doing so now every year that goes by is

one year you won't be getting back so

it's important to take full advantage of

compound interest

a portfolio that averages 10% over a

career in one that averages just 6% will

be hugely different at retirement the

overall market averages about 10% per

year so that's a good benchmark to aim

for

remember that returns vary based on

market conditions though to understand

if your returns are realistic compare

the funds that are available to you to a

similar fund if you're holding a small

cap fund you could compare its

performance to the S&P small cap 600

over the same time period if you have a

target date fund compare that to an

equivalent offered through a company

such as Vanguard there's no reason to

hold on to an underperforming fund the

more years you have between now and your

projected retirement date the more

aggressive you can be you might come to

the conclusion that there are no

excellent options available with your

401 K in which case divert some extra

cash after taking advantage of the match

into an IRA or even a traditional

brokerage account mistake number five

loading up on too much company stock

chances are that you get a discount on

any company's stock it's possible that

this is a good opportunity but there's

extra risk associated with individual

stock

experts recommend that most individual

investors keep most of their money in

index funds or ETS in a portion and

individual stock say 20% or sell this

20% could be comprised of one single

stock or multiple but make sure you're

not allocating too much of your

portfolio to one stock or putting too

many eggs in one basket many times

employees are overconfident in their

employer keeping much of their

retirement in their stock only to find

out that the company is filing

bankruptcy

if your company runs into trouble not

only your job might be in jeopardy but

also your retirement will be as well

mistake number six not understanding the

downsides oral and Cays aren't perfect

and it's critical to understand that

it's wise to be aware of these downfalls

and alternative choices for example they

usually have very limited investment

selections most often between a dozen or

two options while these choices might be

decent the fees that you'll be paying

are likely higher than what you'll pay

with an individual retirement account

where there are virtually endless

investment choices don't underestimate

the ability fees have to eat away your

savings even fees of one or two percent

will dramatically decrease the amount

you've amassed by retirement

in addition I arrays offer the ability

to invest in individual stock if that's

something you're interested in tax

diversification is another big reason to

think about spreading out your

investment contributing to a Roth IRA

will ensure you don't pay any taxes on

those funds during retirement which can

be a huge advantage since 401k

disbursements are taxed at ordinary

income rates

whether or not the taxes better paid now

or later will depend primarily on if

your income bracket is predicted to be

higher or lower during retirement if

it's projected to be higher income

solely from a 401k will result in a

sizeable tax bill

mistake number seven cashing out taking

money from your 401k for a major

purchase is one of the worst things you

can do for your financial future it can

be tempting to take a lump sum out of

this account to purchase a new car or

expensive item instead of funding your

purchase another way but this can have a

negative impact that can last your

lifetime not only will you be forced to

pay hefty fees if viewers draw before

retirement age but you could also face a

big tax burden possibly the worst part

about cashing out is that you'll be

missing out on compound interest

leaving that money in there to grow

allows it to snowball much quicker

taking money out of this account before

retirement should only be done after all

other options have been exhausted

by ensuring your emergency fund is

established with at least three to six

months of living expenses it's possible

to limit the likelihood of resorting to

this

investing in a 401k is engineered to be

simple for everyday investors and

contributing to one is a fantastic start

with some basic knowledge you can earn

substantially more passive income

make the most of your account by saving

early and often resisting the urge to

cash out and managing how your money is

invested these small tweaks can

dramatically increase your savings over

time which puts you that much closer to

turning in your notice and living more

comfortably in retirement