The 3 biggest 401(k) mistakes that can derail your retirement, according to investment researchers

Does the U.S. have a looming retirement crisis on its hands?

Researchers at Morningstar recently performed an exhaustive analysis of U.S. workers' retirement preparedness to find out, and the data revealed good and bad news.

Bad news first: Across the U.S., Morningstar's model predicts about 45% of households will run short of money in retirement.

Luckily, a few key behaviors are likely to get you among the prepared 55%, with one sticking out in particular: investing in a workplace retirement account.

Among Gen X, millennial and Gen Z households, the model predicts that 57% who don't participate in a so-called defined contribution plan, such as a 401(k) or 403(b), in the future will be unable to sustain projected retirement expenses. That number drops to 21% for those with at least 20 years of future participation in such a plan.

In other words, if you plan on contributing for two decades or more to a 401(k) or similar account, you're looking pretty good. In fact, that number could be even lower if it wasn't for user error, says Jack VanDerhei, director of retirement studies at Morningstar Retirement and one of the study's authors.

"Keep in mind that even though people can be on track, there's still a possibility that they're going to shoot themselves in the foot," he says.

The 3 biggest mistakes for retirement savers

It's easy to see why long-term participation in an employee-sponsored retirement plan correlates with positive retirement outcomes. By enrolling in your employer's plan, you're practicing a lot of good financial hygiene.

For one, you're taking advantage of a matching contribution if your employer offers one. Financial planners tend to call these contributions "free money," but you can also think of them as a return on your investment. If your employer matches your contribution up to, say, 6% of your salary, by contributing that 6%, you theoretically earn a 100% return on that investment.

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Plus, by participating in a workplace plan, you're making automatic investments with money that never hits your bank account — a strategy for upping your savings rate endorsed by virtually every financial planner under the sun.

And because such plans are designed for long-term investment — they come with penalties for withdrawing funds before retirement — investors in them generally reap the benefits of long-term, compounding growth in their portfolio.

Still, there are things workplace retirement plan investors can do to screw things up. Morningstar researchers identified three problem behaviors.

1. Taking early withdrawals

If you have a big chunk of money sitting in your retirement plan, you may be tempted to use some of it to address nearer-term goals. Taking a cash payout will generally trigger a tax penalty if you're under age 59½ and will also boost your taxable income for the year you take the withdrawal.

More importantly, every dollar you take from your long-term portfolio is money that doesn't get to grow at a compounding rate.

"In some of the plans we're looking at for a different project, we're finding annual underlying withdrawals of 40%," says VanDerhei. "So to the extent that you're treating [your retirement account] like an ATM machine, you can't really expect everyone who has 20 years of participation to necessarily be on track."

2. Switching jobs and cashing out

When you leave your job, you generally have the option to roll your 401(k) funds into an IRA or transfer them to your new employer's plan. Neither move will jeopardize your retirement readiness, but taking the balance of your account in cash will, researchers say.

A cash-out is still considered a withdrawal and comes with the same tax consequences if you switch jobs before age 59½. And remember, that's money that is no longer in your portfolio generating long-term returns.

"If you change jobs, definitely roll it over," says VanDerhei.

3. De-escalating your contributions

One way to increase your retirement savings rate without feeling a financial sting is to set your contributions to automatically escalate, say, by one percentage point per year. If you've worked at the same job for a few years, you may have started by contributing 6% of your salary to your 401(k) and gradually boosted your savings rate up to 10%.

 A common mistake for job switchers is taking a step back — purposefully or not — with what you're contributing at your new firm, says VanDerhei.

"When you change jobs, they might default you back to that 6%," he says. "So to the extent that you can keep in mind what you were contributing when you left the previous job and at least continue at that level, that's going to be very advantageous — especially for younger people."   

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