A financial planner has uncovered the biggest mistakes workers make when it comes to their 401(K)s – figures show America is facing a retirement crisis.
Andrew Latham, content director at financial services site Super Money, said savers often under-take money from their pension funds and under-utilize their employer contributions.
Speaking to Dailymail.com, he also warned of an increasingly prevalent trend towards “money compensation when changing jobs”.
This is when a person changes jobs and decides to withdraw their entire 401(K) rather than transfer it to their next employer or put it in an IRA.
Latham said, “Unfortunately, ‘job cash-ins’ are not uncommon and it is a financially damaging trend.”
Financial planner Andrew Latham has uncovered the biggest mistakes workers make when it comes to their 401(K)s
According to Latham, savers often fall short by withdrawing cash from their retirement plans too early and by not making the most of their employer contributions
“While this provides immediate money, the long-term costs are far greater — not only from penalties and taxes, but also from the missed opportunity for accelerated growth.”
According to a Harvard Business Review study last year, more than four in 10 workers cash out some or all of their 401(K) when they change jobs.
Of those who do, 85 percent withdraw the entire amount. But Latham points out that these individuals are missing out on years of compound interest — that is, when you earn interest on the money you originally set aside plus the interest you accrue.
For example, if you invested $10,000 with an annual return of 10 percent, you will have $11,000 after one year. The next year, the 10 percent interest rate is applied to the $11,000 and not the original amount.
Financial website The Motley Fool estimates that a 30-year-old with $10,000 in his 401(K) account could grow to $174,000 by age 60 if he keeps the money in his pot and doesn’t takes off.
This assumes the money is invested in funds that yield an average of 10 percent interest each year — a mirror image of the S&P 500 index.
Latham added that another “serious error” was that workers did not pay enough contributions to receive their employer’s full compensation.
Last week, a study by the National Institute on Retirement Security (NIRS) found that a typical Gen Z household — ages 43 to 58 — saved just $40,000 for retirement
Auto-enrollment means that a fraction of an employee’s salary goes straight from their paycheck into their 401(K) account, which is then matched in whole or in part by the employer.
According to the Financial Industry Regulatory Authority, most employers charge a standard 3 percent contribution.
However, many companies often double some of their employees’ contributions – which is why consultants recommend workers increase their contribution, especially when their salary increases.
Latham told Dailymail.com that not making the most of this option is “essentially leaving free money on the table”.
He added that the current financial turmoil could make workers more likely to stop contributing to their 401(K) accounts.
However, he warned against this trend and recommended that the measure should only be implemented in an emergency.
“Financial turmoil often leads to a surge in requests to stop 401(K) posts.” “It’s understandable given that many people are seeking immediate relief,” he said.
“However, it’s important to remember that a 401(K) is a long-term investment.”
Figures show that across the board, Americans of all generations are not saving enough for their retirement
“A contribution freeze can have a significant impact on future pension security.” It’s like turning off the engine while driving. You may save fuel, but you won’t reach your destination.’
His comments come at a time when multiple reports suggest America is headed for a retirement crisis, with workers of all generations underpaying their 401(K) dues.
Last week, a study by the National Institute on Retirement Security (NIRS) found that a typical Gen Z household — ages 43 to 58 — saved just $40,000 for retirement.
This is despite the fact that the oldest members of the cohort, aged 59.5, are less than two years away from withdrawing money from their 401(K)s.
And there are four more years until they are eligible for Social Security at 62. That currently means the cohort would only have $1,600 a year to support them from the ages of 60 to 85.
Consequently, the generation remains
As a rule of thumb, workers should have three times their annual salary saved by the time they turn 40, Latham said.
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