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College Grads: Avoid these 401(k) Mistakes at Your First Job

College graduation is rapidly approaching for many students. Soon, graduates will be starting new jobs, and learning about how to operate in the “real” world. They will be leaving internships [3] and classes behind and trying to figure out how to navigate the pitfalls of the modern workplace.

Money decisions [4] need to be made at this point, including what to do with the money that is being earned. One of the most important decisions is to decide to invest in a tax-advantaged retirement plan, like a 401(k).

If you want to outlive your money [5], it’s important to take advantage of youth and time. However, it can be daunting to handle the decisions that come with a 401(k). Kevin Gahagan, CFP, CIMA, and Principal of Mosaic Financial Partners, Inc. offers four mistakes that young professionals often make. If you want to make the most of your 401(k), avoid this pitfalls:

1. Not Participating

“This is probably one of the most common mistakes made,” Gahagan says. “While tight finances may make the idea of making plan contributions challenging, after accounting for federal and state tax rates and withholding, it probably costs around 80 cents from take home pay to save a dollar.”

This means that your money is more efficient. And it’s even better if there’s a match. “The benefit of participating is tremendously greater,” Gahagan continues. “Subject to the matching program, you get an immediate return of your investment of anywhere from 50 to 100 percent.”

2. Leaving Contributions in Cash

“Many plans have a ‘conservative’ default option that invests incoming contributions in a fixed income type of investment,” Gahagan points out. “For young participants, this type of default is too conservative.”

Instead of using the default option, consider other alternatives. With time on your side, you can better overcome market setbacks.

3. Failure to Invest in Stocks

“For those with a long investment horizon, stock investments should be a dominant component of a portfolio,” Gahagan says.

Stocks offer the potential for better returns during the building phase, and over time, stock market volatility tends to smooth out, creating a trend of gains in many cases. While there is still the chance of loss, over time, that diminishes.

4. Failure to Increase Contributions

Too many young professionals just set an automatic contribution to a retirement account and forget about it. This is a mistake. It’s a good idea to get started with whatever you can afford to contribute, but you need to remember to increase your contributions.

“Regardless of the rate that you begin your savings,” Gahagan says, “you have the ability to increase that contribution amount from year to year as you receive increases to your salary. Dedicating some portion of your salary increase to increasing your retirement plan contribution is the easiest way to increase your savings.”

Don’t Withdraw from Your Retirement Account

Another mistake that many young professionals make is using a retirement account as an emergency fund. While it might be easy to get a 401(k) loan [6], or take an early withdrawal, this can result in fees and penalties. And, even if you repay a loan with interest (to yourself) with no IRS penalties, you still can’t make up for the lost earnings due to the time your money wasn’t in the account.

With careful planning and consistent savings, you stand a greater chance of building a lasting nest egg.

(Photo: Philip Taylor [7])