3 Retirement Savings Mistakes That Are All Too Easy to Make in a 401(k)

Key Points

• You don't want to leave free money on the table.

• You don't want to take an early withdrawal if you don't have to.

• You don't want to lose excess money to investment fees.

• The $23,760 Social Security bonus most retirees completely overlook ›

There's a reason workers are told to save for retirement rather than just relying on Social Security.

The typical retiree needs about 70% to 80% of their former income to live comfortably. Social Security could replace 40% of your pre-retirement salary. But that's only if benefits aren't cut and you earn an average wage. The rest of your retirement salary will need to come from you.

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To that end, it pays to take advantage of a 401(k) plan if your employer offers one. That way, your retirement plan contributions are deducted from your pay automatically, helping you stay on track.

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But if you're going to rely on a 401(k) for retirement savings, it's important to manage that account wisely. And that means avoiding these big mistakes.

1. Not claiming your full workplace match

It's common for employers to offer to match worker 401(k) contributions to different degrees. No matter what match your workplace offers, it's best to try to claim it in full. Otherwise, you're effectively saying no to free money.

Remember, too, that when you forgo even a portion of your employer's 401(k) match, you're not just giving up that money -- you're also giving up the opportunity to invest it. Over time, that could amount to a lot of lost retirement income.

2. Cashing out your 401(k) when you switch jobs

It used to be that people would get a job and stick with the same employer for decades. But that's less common these days, and there's nothing wrong with switching jobs somewhat often to grow your career and boost your salary.

However, one thing you don't want to do is cash out your 401(k) every time you make a job switch. That money is supposed to be earmarked for your retirement. If you take it out early, you risk a shortfall later on.

If you're not yet 59 1/2 and you cash out a 401(k) upon leaving a job, you'll also be subject to a 10% early withdrawal penalty plus taxes. Even with a small balance, that's not a penalty you want.

A better bet when leaving a job is to see if you can roll your 401(k) into your new employer's 401(k) if one exists. If not, you can look to roll that money into an IRA.

3. Not paying attention to fees

One drawback of 401(k)s is that they don't allow you to hold stocks individually. There are different funds you can choose from in a 401(k). But it's important to pay attention to the fees associated with those choices.

Your 401(k) will likely offer the option of both mutual funds and index funds. Mutual funds are actively managed, and their fees reflect that. Index funds are passively managed and therefore tend to have much lower fees.

In some cases, it could make sense to pay a higher fee (called an expense ratio) for a mutual fund with a stronger performance history. But if you're going to pay a higher investment fee, make sure you're getting something in return. If given the choice between a mutual fund and an index fund with comparable performance, you may want to choose the one that comes with the lower expense ratio.

Another option you might find in your 401(k) is a target date fund. These funds adjust your risk allocation based on how close to or far from retirement you are.

Like mutual funds, target date funds can charge higher fees that eat into your returns. So it's important to pay attention before choosing one off the bat.

Saving for retirement is an important thing to do. And if you have a 401(k) through your job, you might as well take advantage of it. But do your best to avoid these mistakes so you don't lose out on money for no good reason.

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