Construction workers have to deal with complicated physical and intellectual demands. As a result, they may overlook the importance of long-term financial planning, especially when it comes to retirement and their 401(k). Even though this is an understandable oversight, it can result in major financial setbacks.
To make it easier for construction workers to secure their financial futures, here are the five most common 401(k)-related mistakes and how to avoid them.
1. Not Contributing Enough (or At All)
Not contributing to a 401(k) plan comes with multiple consequences. For instance, many employers match some or all of an employee’s contribution, so workers may miss out on building significant residual income.
In some cases, some may delay adding to a 401(k). Even though it’s good to get started, regardless of how late you get in the game, you may miss out on significant earnings due to compound growth.
Some reasons people start their 401(k) late are:
- Short-term financial pressures that demand the immediate use of funds.
- A lack of financial education, especially around how to prepare for retirement.
- Mistrust of the System
- Believing that Social Security will provide enough income after retirement.
To avoid not contributing enough to your plan, it’s a good idea to:
- Start small, and then increase the amount of your contribution gradually over time.
- Automate your contributions by using payroll deductions.
- Think of retirement savings as a “delayed” paycheck that you won’t have to work for in the future.
- Seek out financial advice to help you better understand the long-term benefits of 401K contributions.
2. Failing to Maximize Employer Match
Many employers choose to match the amount employees contribute to 401(k) plans, which is basically free money. In order to take advantage of the full potential of these future earnings, it’s important to contribute enough to get the highest possible matching figure.
Here are some reasons why construction workers might fail to maximize the benefits of employee matching:
- A lack of awareness regarding how the matching policy works.
- Using all of their earnings to take care of immediate expenses instead of setting some aside using deductions.
- Misconceptions regarding whether or not they can afford to contribute enough to take advantage of employer matching.
Here are some ways you can avoid missing out on the full benefits of employer matching:
- Learn the company’s matching policy.
- Set up your contributions so they are at least as high as they need to be to qualify for the best matching percentage.
- Automate your contributions so they’re consistently made every time you get paid.
- Avoid early withdrawals
3. Not Diversifying & Rebalancing Investments
It’s common for employees across all industries to put all their eggs in one basket, such as company stock or conservative options like certificates of deposit. Some may unintentionally expose themselves to excess risk by not rebalancing their investments when there’s a shift in the market.
For example, some construction workers have a lot of confidence in their employers and assume their stock will continue to rise. Others may get caught up in the emotion of investing during powerful market swings.
However, it’s still important to diversify and periodically rebalance your investment portfolio to reduce financial risk.
To prevent increasing your financial risk by not diversifying or balancing your portfolio, you can:
- Invest across multiple asset classes, such as stocks, bonds, real estate, and international funds.
- Use target date funds to make automatic adjustments.
- Rebalance your portfolio at least once every year.
- Take advantage of index funds.
- Avoid overloading employer stock
- Increase diversification with an IRA
- Seek professional advice
4. Borrowing Against Their 401(k) or Taking Early Withdrawals
Even though it can be tempting, borrowing or withdrawing from your 401(k) before age 59½ can result in lower long-term savings and reduce your benefits thanks to penalties and taxes.
If employees need to borrow against their 401(k) or take an early withdrawal, there are ways you can avoid this pitfall:
- Build an emergency fund. This way, you have funds set aside in case you suddenly need them.
- Take a relatively short-term loan out against your 401(k). If you absolutely have no other choice, it’s better to take out a loan against your 401(k) but pay it off as soon as possible.
- Use a Roth 401(k) for more flexibility.
- Wait until age 59 ½ or later to withdraw
5. Not Having a Retirement Strategy & Assuming Social Security Will Be Enough
Without a clear plan, you might not save enough money. You also run the chance of investing too conservatively or aggressively.
In addition, relying solely on Social Security is usually insufficient because those earnings may be significantly lower than what you expected. The cost of living steadily climbs, so a dollar today may be worth significantly less in the future.
Many also misunderstand the role of Social Security, which is designed as a supplementary source of income, not a primary source of funds. This is why Social Security alone often isn’t enough to support an older person’s lifestyle.
To avoid this, build a comprehensive retirement strategy. This may involve comparing the 401K plans of different employers and using this to decide which one to work for. You may also want to consider using an individual retirement account (IRA), which can be an effective way to set aside funds for the future.
It’s also essential to get professional advice while deciding about how to fund your retirement. Financial advisors have years of experience that qualify them to help guide your decisions.
Get the Most out of Your 401(k)
Remember that 401(k) management isn’t a “set it and forget it” strategy. Regular contributions, strategic investment diversification, and a comprehensive retirement plan are key to your financial future. At the same time, by avoiding early withdrawals and protecting your retirement savings during job changes, you can further strengthen your future finances.
Connect with the Twelve Points team today to learn more or to get started.
