Many Americans plan for their retirements with an employer-sponsored 401K plan. A 401K allows you to invest pre-tax money, and not pay taxes on the investment gains within the account until you withdraw the money upon retirement. Deferring taxation to this degree greatly accelerates the returns within the account helping you save more efficiently for retirement. Furthermore, many employers match contributions to 401K plans thus making them even more attractive. However, many who own 401K plans make some critical mistakes with them leading to reduced returns and a lower eventual lifestyle when in retirement.
Most importantly, you have to remember that a 401K is for retirement — avoid at all costs the temptation to raid it prior to when the funds are needed upon retirement. Another common mistake when it comes to 401K plans is for their owners to ignore them. You must be proactive in your management of your 401K account, and you can control the allocation between stocks and bonds to be set for your personal risk level and your individual retirement plans. Additionally, many rely solely upon a 401K plan to their detriment. It is likely that you will need retirement assets in addition to what you accumulate within your 401K, so don’t assume you can spend everything you have and then easily live off of 401K funds upon retirement. A 401K plan is one of the best ways to save for retirement, but even the best plans can fail with poor execution. Make sure you stay on top of your 401K and avoid making these common mistakes.