Saving for retirement is one of the most challenging things most people will ever do. You have a few decades to save six to seven figures while also juggling all your living expenses that come up along the way. Even many diligent savers worry they won’t have enough, so you definitely don’t want to pass up the chance to earn easy money for your future.
Yet, a surprising number of people do this every day. Here are three of their most common mistakes.
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1. Not claiming their 401(k) match
Many companies offer 401(k) matches to employees as a way to attract top talent. But in order to earn them, you must put money into your own 401(k) first. Fail to do so, and you could be leaving hundreds or even thousands of dollars in extra retirement money on the table. In reality, you’re losing out on a lot more because you’re also foregoing the earnings had you gotten your match and allowed that money to sit in your 401(k) until retirement.
Claiming your 401(k) match may not be possible if you need all of your paychecks to cover your living expenses today. But if you can afford to save a little, you definitely don’t want to miss out on this opportunity.
Check with your employer to learn how your company’s 401(k) matching program works if you’re not sure. Often, companies do a dollar-for-dollar match or a $0.50-on-the-dollar match up to a certain percentage of your income. Once you know how your match works, you can figure out how much you must set aside annually to claim it all. Divide this by the number of pay periods left in the year to figure out how much you should set aside per paycheck.
You can always save more money if you choose. And you may need to set aside more in future years to claim your full 401(k) match if your income increases or your company’s matching formula changes.
2. Quitting their job before they’re fully vested in their 401(k)
Contributing money to your 401(k) is the first step to earning a 401(k) match, but if you want to keep the matching contribution, you must work for the company long enough to become fully vested. Each company sets its own rules for this.
There are two types of vesting schedules: cliff and graded. Cliff vesting schedules mean that if you quit your job before working for the company for a certain number of years, you’ll lose all the employer-matched funds your company gave you. A graded vesting schedule, on the other hand, gradually releases your employer-matched funds to you over time. You might be allowed to keep 20% of your employer match, for example, if you quit the company after working there for one year, 40% if you quit after two years, and so on.
Cliff vesting schedules can be a maximum of three years long, while graded vesting schedules can be up to six years long. But some employers may allow you to become fully vested sooner. If you’ve worked for the business for longer than six years, you’re in the clear. But otherwise, your employer match may not be all yours just yet.
Check with your company to learn what its vesting schedule is and when you’ll become fully vested. If you plan to leave your job and have earned quite a bit in employer-matched contributions since you started, you may be better off sticking it out until you’re fully vested. Otherwise, try to increase your retirement contributions going forward to make up for your lost matches.
3. Retiring before you’ve worked 35 years
Working at least 35 years before retiring is crucial if you hope to squeeze the most money out of Social Security. That’s because the government bases your benefit on your average monthly earnings over your 35 highest-earning years. Those who haven’t worked this long have zero-income years included in their calculations. Even one of these can drop your monthly benefit by several dollars.
There’s no harm in working longer than 35 years if you’d like to or can’t afford to retire right away. For many people, this actually increases their checks. If you earn more later in your career, the government will discard some of your earlier, lower-earning years when calculating your Social Security benefit and replace them with higher-earning years.
If any of this information was new to you, you may want to rethink your retirement savings strategy and your timeline. Look for any additional opportunities to increase your retirement contributions, like cutting back spending on discretionary purchases, as well as make sure you’re growing your wealth as quickly as possible.
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