3 reasons why your 401 (k) growth is stagnating
Saving for retirement in a 401 (k) is one of the smartest things you can do. This is because Social Security is unlikely to provide you with enough income to live on.
The monthly benefit you receive from Social Security will likely replace around 40% of your old salary, assuming you are an average employee. But chances are you will need a lot more money than that to meet your bills as a retiree, and also, enjoy the freedom that comes with not having a job for whom. realize.
But while putting funds into a 401 (k) plan is a great way to build wealth for your future, you might find that you don’t see the amount of growth in your retirement account that you would like. If so, this could be some of the reasons why.
1. You don’t get your full employer
Many employers who sponsor 401 (k) plans also match workers’ contributions to some extent. But if you don’t put in enough money to land your match, you’re not only leaving free money on the table, but you’re also putting your 401 (k) down.
Imagine spending $ 1,200 a year in free 401 (k) dollars by not claiming your full correspondence with the employer. Let’s also imagine that you do this over a period of 30 years. For a 401 (k) plan invested with an average annual return of 7%, you’re talking about missing out on $ 113,000 when you factor in not only that lost money, but also a lost opportunity to invest it.
2. You invest too carefully
Many people worry about investing in the stock market because it is known to be volatile. But if you stock up on bonds in your 401 (k) rather than stocks, you might be very disappointed with how much your savings can grow.
The 7% return we used in the example above is slightly lower than the stock market average. Now let’s say you save $ 500 per month in your 401 (k) over 30 years with an average annual return of 7%. You’ll end up with around $ 567,000, which is a decent-sized nest egg.
If you play too conservatively and stick to bonds, you could end up with an average annual return of 4% instead. That would leave you with approximately $ 337,000 in retirement. It’s not a trivial amount, but it also gives you a lot less purchasing power than $ 567,000.
3. You lose money on fees
Not all 401 (k) funds are created equal when it comes to the fees you will have to pay to invest in them. Actively managed mutual funds employ people to select investments. And so if you charge them, you will have to pay a high fee to help pay their wages.
Index funds, on the other hand, are passively managed. All they are looking to do is match the performance of the various benchmarks they are tied to. As a result, the fees charged to you for investing in index funds are generally minimal and much lower than those charged by actively managed mutual funds.
Most 401 (k) plans offer a mix of actively managed funds and index funds from which registrants can choose. If you’ve been paying a hefty fee, maybe now is the time to change things up so you don’t waste money unnecessarily, especially since many index funds perform as well as their actively managed counterparts, if not better.
Don’t sell short
Once you retire, you could become very dependent on your 401 (k) money. So don’t limit yourself to a smaller balance. Instead, make sure you claim your full employer every year, invest reasonably aggressively (at least while retirement is still several years away), and avoid wasting money on fees when there is another. option.