A 401(k) is one of the best and most powerful ways to save for retirement — but it’s easy to get it wrong. There’s an incredibly common misstep that can cost you tens — or even hundreds — of thousands of dollars by the time you retire. It’s not how much you make, how you invest or even which plan you choose.
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The fact is, that too many Americans lose money saving in their 401(k) for their retirement — because they just wait too long to start.
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Not Enrolling Earlier
The biggest advantage of a 401(k) comes from starting early. That’s why waiting even a few years can seriously reduce how much you’ll have in retirement. Many employers offer 401(k) plans, but they don’t enroll you automatically — you have to sign up yourself. And if you put this off, you’re missing priceless time in which your money could be growing.
“In my opinion, the number one mistake that people make with 401(k) plans is not enrolling early — or at all,” said Dr. Barbara O’Neill, owner and CEO of Money Talk and author of “Flipping A Switch: Your Guide to Happiness and Financial Security in Later Life.”
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You can fall behind on your retirement plans before you know it — just by not signing up as soon as you’re eligible. O’Neill said that this is far more important than any other mistakes you can make with your retirement plan, such as not maxing out your employer match, cashing out when you change jobs or making early withdrawals.
Missing Out on Compound Interest
Even if you put off enrollment for only a year or two, it can make a huge difference down the line. The longer you delay, the more you lose out on one of the best things about a 401(k) — compound interest.
“Many people think they have ‘plenty of time’ to ‘save later’ and forgo the awesome power of compound interest to build wealth over time,” O’Neill said. “However, it is early savings in one’s twenties that will earn the most compound interest.”
O’Neill also said that often people postpone 401(k) savings because they want to achieve some other financial goal, like repaying student loans or buying a home, first.
But the longer your money sits in a 401(k), the more compound interest works for you. You earn interest not just on your contributions, but also on whatever interest they earn.
“For every decade that someone delays saving for a financial goal, the amount of savings that is needed is two to three times higher,” O’Neill said.
She then gave a concrete example: say you wanted to have one million dollars saved for retirement by age 65. With a 6% annual return, a twenty-five year old would achieve that by investing $6,462 per year. But a thirty-five year old would have to invest $12,649 per year. That’s already a huge difference in just ten years. By the time you’re forty-five, you would need to invest $27,185 per year.
Save Early
You don’t have to contribute a lot to benefit. What matters most is starting as soon as possible. Even a small percentage of your paycheck each month could grow immensely over the span of decades. And it doesn’t have to be all-or-nothing. You can contribute to your 401(k) and save money for your near-term goals at the same time.
“My advice: save for retirement early and often and fund multiple goals concurrently instead of consecutively,” O’Neill said. “For example, reduce debt, save for a house downpayment and fund a 401(k) together at the same time.”
The most important thing is to start earning compound interest as soon as you possibly can. “You can’t earn interest on money that was not saved,” O’Neill added.
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Sources
Dr. Barbara O’Neill, Money Talk.
This article originally appeared on GOBankingRates.com: I’m a Financial Expert: This Is the No. 1 Mistake Americans Make With Their 401(k)
