Many investors put off important investment decisions due to inertia or trepidation. Motivational speaker Brian Tracy suggests that "Almost any decision is better than no decision at all." However, this investment inaction can have potential consequences for an individual's future financial security.
One of the worst decisions a person can make is to not enroll in their 401(k) plan.
More and more companies are automatically enrolling workers into their retirement plans, but nonparticipants sacrifice one of the best ways to save for their eventual retirement and forfeit the money that any employer matching contributions represent.
Let's say that you're 30 years old and you earn $60,000 per year. You have the opportunity to enroll in your employer's 401(k) plan and contribute 10% of your salary, which is $6,000 per year. Your employer also matches your contributions up to 3% of your salary, which is an additional $1,800 per year.
If you decide not to enroll in the plan, you're not only missing out on the $1,800 in employer contributions, but you're also not saving $6,000 of your own money. Over the course of 35 years, assuming a 6% rate of return, that decision could cost you over $1 million in lost retirement savings.
This example illustrates the deferred cost of not investing in a 401(k) and how it can have a significant impact on your future financial security.
Clearly, not participating in your 401(k) plan could be one of the most costly indecisions one can make. Additionally, when a participant fails to select investments for their contributions to the 401(k) plan, the plan may automatically invest that money in a way that is not consistent with the individual's time horizon, risk tolerance, and goals. It is also important to note that in most circumstances, an individual must begin taking required minimum distributions from their 401(k) or other defined contribution plan in the year they turn 73. Withdrawals from these plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10 percent federal income tax penalty.
Non-retirement plan investments may also accumulate over time, leading to a collection of investments that may have no connection to the investor's objectives. Without periodic reviews, investors may make a default decision to own investments that may be inappropriate. Therefore, it is crucial to give careful attention to retirement investments, which may benefit from deliberate, thoughtful decision-making. Investors can receive a complimentary portfolio review to determine what decisions they might need to make for their portfolio.