Simple Explanation of Critical Retirement Plan Mistakes to Avoid
Okay boomers...in these last years before you retire, you need to pay attention to your money. I don't know about that sort of thing but I know people that do. Here is a guest post from a man that is obviously paying attention. I think you should read this simple, layman's explanation of some big mistakes people make when it comes to their retirement investments. This made such good sense to me. By guest author Richard Jacobs.Passed in 1978, the 401(k) was introduced as a type retirement savings account by the Internal Revenue Code to encourage people to save more money for retirement. According to the Investment Company Institute reports as of 2011, the 401(k) plan retirement system holds over $3 trillion in assets on behalf of more than 50 million active participants and retirees. The plan established by qualified employers allowed eligible employees to make salary reductions or contributions on a post-tax or pre-tax basis. The plan gave people a way to save for retirement, while at the same time lowering their state and federal taxes. If you decide to do this, and you should, there are some mistakes you should avoid.
- Inaction: Not participating in your company’s retirement plan can be a fatal error. As an employee, it is your responsibility to take an initiative and complete the paperwork to enroll and benefit from your company’s retirement plan, such as 401(k), 403(b) and other similar plans.
Note: Contrary to what you may think, enrollment process for your company’s retirement plan can be handled online. May employers will automatically enroll you in their plans. All you have to do is to start contributing. By doing so you may actually be giving yourself a raise. For example, if the employer matches up to 6 percent, it means that for every dollar you contribute (up to 6% of your earnings), the employer will also contribute the same to the plan. Over time, the benefit from 401(k) grows to a significant sum of money.
- Not Diversifying: Putting all your eggs in one basket is a bad idea. You must diversify. Apart from investing in the employer’s retirement plan, take the time to choose an asset allocation plan or an investment model. These options provide you a choice for diversification. Once you choose one, leave it alone.
- Dipping into the Egg Basket: Borrowing from your retirement plan is not a wise thing to do. Even though the common perception is that you are borrowing for your own needs, you might end up paying a loan charge. Your employer may not charge you with it, but some employers actually do. This loan charge has a flat fee of around $150, regardless of the size of the loan. You will also be charged a rate on the loan, which can vary, depending on the loan amount. Some plan loans have significantly higher rates. You also need to understand that even if you pay back the loan over time, and the loan gets paid back to your account, it will negatively affect your total return on the funds, which will have an impact on the long term results from the investment.
- Forgetting What the Money is For: The next big mistake which should be avoided is cashing out your plan. Even through the idea may seem absurd to some, you will be amazed to know the number of people who cash out their plans when they leave the previous employer. Keeping the long term focus in mind, you should not cash out.
Richard Jacobs is a chief editor since early 2007, and he currently works for MyDUIattorney. A website that helps you to find the right DUI Attorney, you can search for a New Jersey DWI Lawyer online, anytime!