Saving well in a 401(k) could set the stage for a comfortable retirement. As of 2022, the average 401(k) balance among Vanguard participants was $112,572, while the median balance was $27,376.
But no matter what savings goal you want to set, it's important to manage your 401(k) well from the start. And that means steering clear of these newbie mistakes.
The money in your 401(k) plan shouldn't just sit in cash. If you go that route, you might stunt your savings' growth in a very big way.
But it's just as important to actively choose investments for your 401(k). If you don't, you might end up unhappy with your results.
Many 401(k) plans are set up to automatically invest enrollees in a target date fund if they don't choose investments themselves. Target date funds are designed to help savers meet specific milestones. A target date fund for retirement will commonly invest your money more aggressively during the earlier part of your savings window, and then shift you over to safer investments as the end of your career draws closer.
For some people, a target date fund is a good investment solution. But that may not be the case for you. You may find that you're able to generate stronger returns in your 401(k) by investing in mutual funds or index funds. So take a look at your investment choices, rather than let your money get invested for you.
Another drawback of investing your 401(k) in a target date fund? These funds are notorious for charging hefty fees, and the same tends to hold true for mutual funds.
Investment fees can eat away at your 401(k)'s returns over time, limiting the extent to which you grow your balance. So always look at fees before deciding where to put your money. And generally speaking, index funds are going to be your best bet from a fee perspective because these funds are passively managed.
It's common practice for employers to match 401(k) contributions to some degree. Figure out what match you're entitled to, and aim to put in enough money from your paycheck to snag it in full. If you don't, you'll end up passing on free cash.
And remember, when you give up an employer match or a portion thereof, you also give up potential gains on that money. Forgoing $2,000 in employer matching funds when you're 40 years away from retirement will mean actually losing out on over $43,000 if your 401(k) normally delivers an average annual 8% return, which is a bit below the stock market's average.
The simple act of signing up for a 401(k) plan is a great thing to do for your future. And the more you're able to contribute to that savings plan, the better. But do your best to steer clear of these mistakes when you first open your 401(k) so you don't wind up short on retirement cash down the line.
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