A second home in Boca, a pied-a-terre in Paris -- you have no problem dreaming up your ideal retirement. But the nitty-gritty financials of how you’ll fund it? Meh, you’ll glance at that 401(k) statement later. We checked in with Meghan Murphy, vice president of thought leadership at Fidelity Investments, about common retirement plan pitfalls, and how to bounce back from them.
If you work for an employer that offers a 401(k)—and better yet, a match—don’t wait to enroll. Here’s why: Say you’re 25 and earning $60,000 a year. By putting away 15 percent now, you could save $800,000 more than if you wait until age 35 to start contributing.
YOU LEAVE FREE MONEY ON THE TABLE
A whopping 21 percent of the population doesn’t save enough to take full advantage of their employer’s 401(k) match, per Murphy. That said, make sure you’re familiar with all the rules about vesting, at the outset. In many cases, you have to work for an employer for a certain period of time in order to make—and keep—that match.
YOU IGNORE THE FEES
Investments that are offered by an employer are also defined by that employer. Some companies offer hundreds of funds while others offer a smaller lineup to choose from. Regardless, it’s on you to read the fine print—and fee history—of the funds presented to you in order to be crystal clear on where your money is going. (Typically, this is outlined in the prospectus, but you can also ask your employer about the “expense ratio” of the various funds you’re choosing from.) Bottom line: As with any business, running a mutual fund involves cost. Some cost more than others and awareness is key, so you can figure out your comfort level.
YOU SET IT AND FORGET IT
Most financial planners will tell you to save 15 percent annually throughout your career. But not everyone can do that right off the bat and, as a result, you have a tendency to set your 401(k) contribution when you start a new job and leave it at that for the entirety of your employment there. An alternative: Most 401(k) plans offer something called annual escalation. Checking this box when you activate your retirement plan automates an annual percentage increase. (Say, every May, your 401(k) contribution will go up by 1 percent.) Over time, you end up saving a heck of a lot more than you think you are. (This calculator from Fidelity will show you the exact difference a small change can make over time.)
YOU CHANGE JOBS…AND CASH OUT
This is a biggie. While it’s tempting to take the $16,000 you set aside at one job and spend it on an expense like a new car, it’s far better to leave that cash invested for the long-term. (Say you invest that $16,000 at age 30—over the course of a 30-year career from that point, that $16,000 could become $87,000 at retirement age. You also have to pay penalties for an early withdrawal.) Often, you can just leave that cash invested with your old employer. Or you can roll it over to the new employer’s plan or convert it to an IRA. (Something that gives you more investment options to choose from.) Just keep in mind: You’ll reap much larger financial rewards if you leave that cash invested.