Don’t make these 401(k) mistakes

Welcome to Money Talks with Ken Wink from Summit Financial. Working with people you trust. Planning for your financial future means navigating challenges like market volatility, inflation, and retirement income. Money Talks is here to help by addressing common financial concerns, sharing valuable strategies, and exploring ways you can work toward your financial goals. Now, let's get started with Money Talks.

Today we're going to discuss common 401(k) mistakes and why it's important to avoid them. Welcome to Money Talks. My name is Ken from Summit Financial Consulting. If you'd like to hear more about what we discussed today, give us a call at 586-226-2100 or go to our website, summitfc.net. While you're at the website, make sure you check out our podcast page and you can subscribe on Apple Podcasts, Spotify, or Apple Music. So today we're just going to talk about a handful of common 401(k) mistakes that might make it harder to reach your retirement goals. But before we get started, let me introduce my co-host, Tony. Tony, let's get started with a brain teaser. Have you ever made a big mistake that you've regretted?

Just in general or financially? Oh, anything. Oh, well, yeah. I've got lists this whole book. I've got a list of all these pages are full of mistakes I've made, about 77,000 pages. We've all made a lot of mistakes. I'll tell you a couple right off the bat. One that has to do with what we're talking about today, and I don't know if I should save this story, but I know one of the points you're probably going to make about avoiding 401(k) mistakes is leaving a 401(k) at an old employer. And I have a story. I'll tell it when we get to that point about that. I have a personal experience with that. And that was something else. But yes, I mean, we've all made mistakes. I mean, in my youth, I thought I'm lucky to be alive is what I'm saying. Yeah. I've made some, you know, in my 20s, I mean, I can't, I lost count of the mistakes I made in my 20s. But I will say this also, when I was in my 20s, I had no, I did not learn personal finance or good finance skills. financial habits as a kid. And I somewhat blame my parents. I love my parents. And they still are the greatest people ever. I love them so much. And they were good parents, but they were horrible about teaching about finance.

And in school either, you know, when I was in school, they didn't even have a they didn't have a personal finance class.

At least my kids, when they got to, you know, high school, there was an elective you could take. And that was personal finance, which they took. And but it was an elective and it was one class, maybe two. You know what I mean? For one year, part of one year. And that's not they should it should be required like math. English and math, reading, science, history, personal finance should be just as important as regular math. I think it should be taught, in fact, more important. I just the biggest mistake, Ken, is that I didn't start my first full time job out of college, did not start taking advantage of a 401(k), wasn't saving for retirement until later in life. I started much too late. That's my, that's my, that's more of a regret, but it's also a mistake. So mine is financial. I always, when I'm looking at you, Ken, why am I only thinking about financial mistakes? I look at you and I'm like, Oh, here's the, here's the financial advisor. I better. Um, but yeah, I mean, other mistakes, I don't know, you know, um, Not being careful with my first car and driving it in a ditch. How about you?

Have you ever made a major mistake in your life that you regret? I am fully focused on this weekend and hoping not to make any huge mistakes. I've had these three buddies that were my college dorm mates, and we get together every single year. for one day and try to relive our past a little bit. So we'll normally play two-on-two basketball, which as we're getting older, it's getting more and more challenging, and we're calling it off this time because I hurt my leg playing softball. Um, but then we go play foaling. Um, I don't know if you've ever seen foaling before. It's bowling mixed with football. Do they have that in Minnesota? No, Ken.

And that sounds horrific.

Bowling mixed with football? Yes, it's great. So just throwing a football. So they've got this giant room, and it's just lined up with boards with... bowling pins on them and you and your teammate are on the same side and you're just trying to knock down the bowling pins with a football across the arena. And what makes it fun is that they'll have 20 boards all set up, so if the guy's playing next to you have an errant football bounce and knock over your pins, like, that helps your opponent. So you're like playing defense against other people throwing footballs and then your opponent's throwing a football and You can't touch it until it bounces. It's just like you got to have your head on a swivel and just to see how good you are at throwing a football. But we've I don't know.

I actually at first I thought that sounds awful, but I love throwing a football and at a target. That sounds fun. Yeah. Yeah.

Yeah. So we do that. And then we go home and play the video game from 1997 that we used to play in our dorm. Yeah. I still got the old console, so looking forward to some fun.

Are you going to tell me which video game that is? Is it a Mario one, or is it an EA sports game, a football game, or what is it?

GoldenEye Bond for Nintendo 64. Oh, wow, a James Bond video game. That's cool. That's cool. I never played that one. Yeah, looking forward. We do it every year. So, yeah, hopefully no. We're Ubering everywhere, so that'll be good. That's good.

That's good. All right. Don't make any mistakes. Make wise. I'll tell you what I tell my kids who are all in their 20s. Make wise decisions. Make good choices, Ken. Yeah.

What do you call that sport again? Folling. Folling.

So F-O-W-L-I-N-G.

They've got like, I think they've got 15 locations now. Like they have actual special folling places. Yeah. Called the Folling Warehouse.

I don't think we have that anywhere here. That is crazy. That could be an episode. You're kind of buried the lead with that. I can't believe we haven't been talking about that on the show each week. We need to do a whole episode on foaling, I think. Okay, so our topic today is an important one, so we should jump into that. You wanted to talk about 401(k) mistakes. Yes. And I already told you I've made a couple of mistakes, not starting one soon enough and leaving one at an old employer. What's the first mistake to avoid?

So just not understanding the difference between the different types of plans. So a lot of people don't realize that some 401(k) plans offer two different options. So there's the traditional pre-tax 401(k) and then there's a Roth 401(k). So. One thing that they have in common is that they allow you to contribute and the money can grow tax free while it's inside the account. They both have the same contribution limits and with both plans, employers can do a match if they want. But where they're different is a traditional 401(k) is funded with pre-tax dollars. So that means you don't have to pay taxes on it right now. But then when you go to retire, that's when you pay all the taxes on it. So you get a tax break upfront. So that can be a big advantage, especially if you're in a high tax bracket right now. With the Roth, complete opposite. You pay taxes on it right now. And then when you go to retire, you don't have to pay taxes on it. It's 100% tax free. So I always want to put an exclamation point and an asterisk next to this is that if you plan to retire before the age of 65, It's really critical that you talk about this and think about this now. So you may have to plan 20, 30, 40 years before you actually retire. It can have a huge impact on how retirement looks. And it all just comes down to health care. A lot of people don't get health care from their employer during retirement nowadays. So if you retire before the age of 65, you have to get health care on your own. And your health care costs is primarily based upon what your income is. Your taxable income. Yes. Yeah.

It's called IRMAA, right?

Yeah. Aunt Irma. So if you've got a Roth 401(k), that does not count as taxable income. In some cases, Tony, I've given clients 100% free, no cost, like no premium health insurance because we've manipulated their income, at least their taxable income, to make it look like they're not making much. So big, big decision for each and every person, whether they do pre-tax or Roth 401(k) contributions.

Right. And my daughter, who's 21, opened a Roth, and she's putting a couple hundred bucks into it each and every month. Very nice. About $200, $300 a month into it. And, you know, that's really great because right now she's... Not only is she's not really paying it, she gets money back in taxes typically. So now's the time for her to be. I wish I had done that. It's just another mistake I made. Can you imagine if you'd started a Roth when you were 21 and put $300 a month and do it? Yeah. Awesome. She'll be able to retire in her early 60s with plenty of money and tax free income. So that's good. But yeah, and Roths aren't just for the young, but it's smart to have a Roth. And it's not like, you know, you don't necessarily have to put all your money there. You might want to spread it around, but depends on where you're at. Everybody's situation is different, right?

Yeah. Yeah. Yeah. And especially with somebody young, you know, who knows what our national debt's going to be at that point? You know, tax brackets may go up considerably. So paying taxes in today's dollars may be a big, a big benefit for her. Yeah.

Yeah. So Roth 401(k)s are available now from most companies. And I think that's a good one. A lot of Roth employer sponsored type plans. What next?

So the next one is just doing due diligence when you change jobs. So a lot of times people change jobs and they get a nice bump in salary, but they don't necessarily make the most of it. So I tracked down this 2024 Vanguard study and they said that 55% of people that switch jobs end up actually reducing their 401(k) savings. And when they do that, it usually costs them $300,000 throughout their lifetime. Wow. Yeah. Just because they didn't adjust the amount that they're putting into their 401(k) for their new income. So most of the time they're getting a raise, but then they don't increase the retirement savings correspondingly.

So that's that's that's that's not a mistake. I mean, I anytime I get a raise, I just put it now. I didn't do this my whole life. But now if I get a raise, I just increase my what I'm putting into my retirement account by that much.

Yeah, that's that's awesome. Yeah, they they looked at, you know, if someone's auto enrolled, a lot of employers would just make people basically start putting in, you know, they can always, which is good, too. But yeah, having that auto enroll feature is is really good. But then if people don't auto enroll, then it's it's really bad. Yeah, it is.

So you have to be contributing to retirement accounts, whether it's your 401(k) or TSP or 403(b) or or an IRA set up through your financial advisor. You got to be saving for retirement and you have to save your first full time job. You should start that. Right. Yeah. And usually the problem with the auto enroll, it's good, but it's usually around three percent. Most companies auto enroll yet. And that's not enough. Sometimes that's not even enough to get a full match. You probably want to put in at least six percent to make sure you're getting a full match and to make sure you're saving enough. Right.

Yeah, I just have a rule of thumb that just from doing this for 24 years and looking at thousands of financial plans, people that are putting in about 10%, now that includes both what you put in and what the employer's putting in, but people that put in 10%, they usually don't retire until their late 60s or even their 70s. If people are putting in 15%, they're normally retiring in their mid 60s. And if you're all the way up there at 20%, a lot of people will then retire in their 50s. Wow. Yeah, everyone that's listening,

I'm making a note. Increase my 401(k) contribution per Ken. All right. Make it happen. Yeah, yeah. I know we didn't start doing that until later, putting in over 10%. For a long time, I just left it at six because I knew I'd at least get the full match and some. So, yeah, that's smart. Yeah, you got to get up. You have to be putting in as much as possible. And it's not like you're going to miss it because it comes right out of your check, right?

Yeah. I mean, when you get a raise, you just basically have to say, like, most people are just going to say, what can I spend this on? Or like, what new thing can I buy? Oh, maybe we'll get that pool or, you know, stop and think, when do I want to retire? Because that might be a little bit more important than that maybe short term thing you were spending money on.

That's true. When do you want to retire? Okay, I need to put a little more away each month. So, and I think this is a good time to mention, Ken, that anytime you change your income, like get a raise, or you have a new employer, change jobs, make sure you're meeting with your financial services professional, a wealth advisor like yourself, and, you know, rerun those retirement projections, figure out when you want to retire and make sure you're on track. So what's

Next one you sort of hinted at earlier, it's just forgotten 401(k)s. So when a lot of people change jobs, they just sort of forget about that old 401(k). So I found a study that said in 2023, there was 29 million forgotten 401(k)s out there and it was $1.6 trillion in unclaimed money. So yeah, that's And that's just in America. I saw that study you pointed out.

You told me about that. In America, $1.6 trillion in unclaimed money as of May of 2023.

Yeah. I mean, it's like one out of every 10 people have a 401(k) in the United States. And, you know, when you take out the retirees and babies, you know, it's like a really good percentage of the U.S.

It's a huge percentage and a huge dollar amount. That's trillion with a T. That's real money even to you, Ken. One point six trillion. But I made that mistake. I alluded to that earlier. Kind of my fault. But what happened was I worked for a company for five years. They got bought out by a bigger company. And then we filled out some forms for, you know, new benefits with the new bigger company. Well, I didn't. I just filled out my form for my, okay. New 401(k) filled out what I want to take an hour. Okay. I have to redo this. Okay. And then I'll be just like, just trying to get through it.

And they're not meetings that they got to move a ton of people.

Nope. Nope. And I missed it. They probably sent an email. It was probably, or they had a huge big meeting and, you know, somebody who's cracking wise with me before, you know, I wouldn't be talking during an important meeting. You know, that can, no, no, I wouldn't be joking around during a meeting. But anyway, so what happens was I worked there for five. I have my same job, so it's not like whatever. It's, you know, just owned by a new company. But after five years, so it's a total of 10 years I worked there, then I came here. I started working with Gradient and director of radio for Gradient Financial. And I went to move my 401(k) over to this 401(k) here. And I'm like, well, that amount can't be right. I have way more money in there. I have way more than that. And I hadn't been checking my statements either. I wasn't working at that time with a financial advisor, which is not good. So that would have helped because they would have talked to me about that. Hey, what should I do with my old 401(k)? Right. And they would have looked into that. But what happened was, is I never switched that old one from the first company. You had to go in and manually fill out forms and have it moved. And I didn't do that. Didn't know I had to do that. Thought it was automatic, but it wasn't. And... it was a significant amount of money. And luckily, I went back and found it. But Ken, people have, I think I read 10 to 13 jobs or 14 different jobs during their lifetimes. And at each one now, you're auto enrolled in a 401(k). Even if you work a job for six months or a year, you might be acquiring money. And there are so many forgotten. People think, well, I'd never forget my 401(k). That's, you know, I'd never forget $50,000 or $30,000 in a 401(k) happens all the time.

Oh yeah. Yep. Yeah. Well, good news. The government in the secure act 2.0 in 2022, the department of labor is working on a retirement savings, basically a lost and found database to help people find their old accounts. So the website is lost and found.dol.gov. So it's not 100% yet, Tony. You know, this is a government thing. It's going to take a few minutes to get it all situated. But there is a light at the end of the tunnel for people that have forgotten about an old 401(k), or maybe they're not even sure if they have an old 401(k). You know, go check out the website and see if you can find an old account. Yeah. I mean, it's better to consolidate.

Yeah. It's a good one. That's lostandfound.com. dot D-O-L dot G-O-V. And it is there. It's good. And not everything is up there yet, but I know people who have already used it and found accounts. So what's next? What's another mistake we need to avoid, Ken?

Next mistake is just not looking at your 401(k) investments. So a lot of times people just set up a 401(k) and then they just sort of they just forget about it, you know, and especially if they get auto enrolled, it's just sort of by default. So some financial advisors will say you should adjust your risk over time. So like when you're younger, you're going for it. You got as much risk as you can take on. And then maybe once you get older, you start dialing back the risk a little bit. So one way to accomplish that particular goal is just to invest in target date funds. So they automatically will pick a date that you're most likely going to retire and then they will adjust the risk down as time goes on. That's good. That's a starting point. But here at Summit Financial, we like to take it one step farther because the stock market doesn't care what year you were born, Tony. You're fantastic, but the stock market doesn't care what year you were born. So sometimes things are good and sometimes things are bad with the stock market. So what we do is we look at our clients 401(k)s and we will look at every single investment option you have. And then we'll look at the expense ratios. We'll look at what options you have. Do you have large cap, mid cap, small cap, international? When it comes to bonds, do you have U.S. government bonds, corporate bonds, municipal bonds? There's so many different options. Is it growth? Is it value? Is it a blend? So there's so many different things. Most people don't look at all that. So what we do is we buy this really expensive research and the research tells us most likely what sections of the economy are gonna outperform. And then we'll proactively reach out to our clients and tell them you should be investing in this. And then when we see a train coming down the tracks and we think the stock market's about to crash, we'll proactively reach out to our clients and tell them, Hey, let's, let's dial back the risk a little bit. And like back in April, when things were really rough after the tariff thing, now we're reaching out to people and saying, Hey, step on the gas. We think this is the bottom. It's going to start to head up. So we don't have a, you know, we don't have a crystal ball. We're not perfect, but generally speaking, when there's big things on the horizon, like a COVID, you know, okay, maybe we should tap on the brakes a little bit, but then once the dust settles, let's step back on the gas. So looking at fees, looking at sectors, looking at how large the companies are that you're investing in, all of that at least has the potential to help people do better. But in any case, just check it out every once in a while. Talk with HR, talk to your financial advisor, make sure that your mix in your 401(k) is appropriate for where you are in life and what your goals are.

Yeah, and fees is another big mistake people make, not realizing that they are paying fees. What are they? And I know you can run reports, look at things, and a lot of people don't read the fine print. That's why I don't want to make a move. I want to know where I'm at and make sure my money is working properly. For me, where I needed to be. One big mistake that I think a lot of people make that I this is another mistake I made early on is match. Right. Talk to us about that. I mean, that's that's important, isn't it?

Yeah, so basically it's free money. So everybody likes free money. So the simplest way to increase the size of your 401(k) without really doing much extra work is to just take advantage of the match. So talk to HR, look at your documents that you received when you first signed up with the employer and just find out how much do I have to put in to take full advantage of the match. And a lot of times we'll sit down with people and they're not contributing enough to get the match. So they're literally just leaving money on the table that their employer.

And that's part of your benefits. It's like we're going to give you this cash as part of your benefit. Oh, yeah, I don't want that. Who would say no to extra cash as part of their employee benefit package? I don't understand.

Yeah. And like sort of building on that, one of the other huge mistakes that we see people make. So you mentioned earlier, like sometimes people have a lot of jobs in their lifetime. Yeah. So often people just look at salary when it comes to should I take this new job? Yes. You want to look at the match. But before you leave your current job, you have to look at the vesting schedule. So, you know, the 401(k). Yeah. Yeah, so it's a great perk having a 401(k) match, but sort of lurking in the shadows is this vesting role. So the way vesting works is every employer is different, but on average, it's either three years or five years. So if you leave your current job within three years, or the most common is actually five years. So if you're at your job and you leave after three years, there's a good chance you're going to lose about half- 40% of your matches, the company's going to keep those when you leave. So people think like, oh, my 401(k) has gotten so big, but if the 401(k) gets chopped because you left the employer. So when you're thinking about a job change, it's not just all about that salary. You might want to look at the vesting schedule right off the bat and see how long do I have to stay with this company to actually keep this money? So if you, you know, if you've been just pounding money into your 401(k) and then you leave after two or three years, it's going to take a big financial toll on your retirement savings.

So when you're free money lost, right? Yeah. Yeah, absolutely. And it can be a big amount. In fact, I have a great story to go with this one. Well, not good story. I had a friend at that same job I was telling you about. He worked there five years or about five years and quit, got another better job offer and left. And he had been for the full five years, he'd been putting in more than the match and, Um, then the day after he, he, his last day, he put in his notice, worked a couple more weeks left. Then the next week I was talking to him cause we were good friends still. And he said, you're not going to believe how I'm, I, they screwed me. And I go, what do you mean? And he goes, well, uh, I, uh, I keep track of my 401(k) and what the amount is. And then when I went to transfer, it was much less. And I looked into it and I went back and I called him the day after he left. He went back in and said, hey, you know, why is this amount to be transferred so much less? And they said, well, you have to be employed five years to get your match. Otherwise, you lose it. One month. He was one month away. Oh. Oh, no. Four weeks. Had he just worked four weeks and he said, come on, it's only a month. Can't you? They wouldn't. You know, they're like, no, won't. So sorry. Yeah. Thousands of dollars, actually. I mean, yeah, that's just you don't want. So that's a big mistake to avoid. And these are all costly mistakes. All of them you've mentioned can cost you money. People just don't realize it. I think this has been a great conversation. Ken, is there anything else you want to add before we go today?

Last one is just looking out for and not tripping over early withdrawal penalties. That's a common error that we see. So if something comes up and you got to dip into that 401(k), you really got to do your homework and maybe talk to a tax advisor or a financial advisor. And you've got to decide whether you want to do a withdrawal or a loan. Most 401(k)s won't let you do a withdrawal unless it's a hardship and you've got some really big challenges going on. but you can also do a loan if it's offered. So, you know, life happens, emergencies happen, you know, you just might need to tap it for one reason or another. So just a quick summary with a 401(k) loan, it does charge an interest rate, but the good news is that they actually give the interest right back to you. So you're sort of loaning money from yourself and then paying yourself back. So that's sort of a nice perk, but sometimes when you do set that up, It's a pretty hefty payment. Some 401(k)s are more flexible than others. So you got to look at the terms of the loan options available and what the interest rate will be and make sure that you can afford it. If you go with the withdrawal option, even if it's because of a hardship, you're still going to get charged taxes on it. So if you're before the age of 59 and a half, you're going to get normal income taxes. It's going to actually increase your income for the year. So you could accidentally go into a higher tax bracket. And then there's the 10% early withdrawal penalty on top of that. So taking me out too soon is definitely something that can make people struggle financially and could be a pretty big mistake.

But you would advise not doing either of those things, right? Not touching your retirement savings at all until you're ready to retire, right? Because that's what it's for.

That's the best case scenario. Yeah, we try to look at other options that might be more tax advantage. So one thing that a lot of people will do is a home equity line of credit on their home because now potentially that interest is actually tax deductible and it doesn't set you back so far on your retirement goals. So, yeah, in a perfect world, just leave your 401(k) alone. Your future self will probably thank you, but definitely discuss it with a tax advisor or your financial advisor.

For sure. Well, great stuff. A lot of great knowledge about your retirement accounts and what not to do to make costly mistakes. Ken, how can our listeners get a hold of you if they have questions about this or other aspects of their finances or want to get a retirement income plan in place?

Can they do that? Yeah, go to our website summitfc.net or you can just give us a call at 586-226-2100. We'd love to answer all your questions about 401(k)s, retirement, financial strategies, anything that you should I lease or buy a car, any goal, any question that you have, we'd be happy to help. We want everybody to retire successfully.

All right, well, thanks, Ken. Great show today. Listeners, that does it for today's episode of Money Talks with Summit Financial Consulting and our host Ken Wink. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.