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.
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.
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.
