Are You Making These 8 Costly 401k Mistakes?

Are You Making These 8 Costly 401k Mistakes?

In order to enjoy a comfortable retirement, it’s vital you save as much as possible. Luckily, there are numerous investment vehicles designed to aid you in achieving your retirement goals. If used properly, a company-sponsored 401(k) is a great resource for boosting your retirement savings. Unfortunately, too many Americans are making these 401(k) mistakes that may be costing them thousands.

If you want to maximize your retirement reserves, here are the most common 401(k) mistakes to avoid.

1) Not contributing

How would you like to have an extra $415,699 to use in retirement? Seems like a good idea, right? Well, if you contributed $100 a month to a 401(k) for 40 years (assuming your portfolio composition is 70% stocks and 30% bonds) on average based on historical back teting you would end up with that amount. 

One of the biggest 401(k) mistakes you can make is not participating in a plan. Not participating results in missing out on the opportunity to save for retirement with the tax-deferred dollars.

Most “experts” recommended to contributing 10-15% of your income. If this feels like a large sum to begin with, start with a smaller percentage and slowly increase your contributions over time. Some employers will actually automate this process for you. Ask your employer if they can automatically bump up your contribution every few months. This will help you ease into saving the appropriate amount.

2) Not contributing early or not maxing out your contributions

The earlier you get started with retirement savings the better. Here are two tables that illustrate the average returns our retirement builder calculator comes up with based on different starting ages. The sooner your start the sooner you put compound interest on your side which is a huge plus.

Scenario 1 - modest contributions:

  • You contribute $500 per month ($6,000 per year)
  • You select an asset allocation of 50% stocks / 50% bonds and rebalance each year.
  • By age 65 you would amass the following (on average):

Starting Age

Average Balance at Age 65 ($6,000 per year)















Scenario 2 - max contributions:

  • You contribute $19,000 per year which was the 2019 maximum for 401(k) contributions.
  • You select an asset allocation of 50% stocks / 50% bonds and rebalance each year.
  • By age 65 you would amass the following (on average):

Starting Age

Average Balance at Age 65 ($6,000 per year)
















3) Not participating in company-sponsored match program

In addition to missing out on the opportunity to grow your money using tax-deferred dollars, you may also be forgoing your company’s match program. Many companies offer a contribution match, up to a certain amount.

For example, let’s say your employer offers a retirement contribution match of up to 3% of your wages. So if you contribute 3% to your retirement account, they will match that and kick in 3% too. 

A matching program is your company giving you free money towards your retirement savings. Not taking advantage of it is like leaving money on the table.

Let’s say 3% of your income is $150 per month, which you contribute to the 401(k) plan. With the matching program your company will contribute $150 to your account as well. That makes a total of $300 going in each month - all tax free. 

If you started contributing at age 25 and stayed consistent for the next 40 years, our nest egg builder calculator shows you would amass an average of $1.25 million, depending on market returns.

Do you think you could spare an extra $150 a month in order to accumulate over a million dollars?

4) Not reviewing your asset allocation with professional help

Most 401(k) plans allow you to select your own investments. If you have limited investment experience, you may wonder how you will know which investments to choose? Your best bet is to speak with a financial professional who can guide you with this decision. Some companies offer professional guidance as a part of their program. If your plan doesn’t offer any guidance, try to speak with a financial professional you trust.

Financial professionals can help you choose the best asset allocation based on your financial goals. They can also help you select assets that will keep your fees low. Many mutual funds have high expense ratios that could cost you more than you anticipate. Selecting low-cost investments can help your money grow faster because the effects of compounding are stronger. In generally any fund with an expense ratio over 0.5% is “expensive” and many options are now below 0.1% which is excellent.

When it comes to reviewing your asset allocation our Net Worth Dashboard tool allows you to track all your investments in one place.

5) Not regularly reviewing your plan

Even if your contributions are automatically collected from your paycheck, it’s still a great idea to review your account regularly. You will want to ensure contributions are being made and you still have the appropriate asset mix for your financial goals.

As you move closer to retirement, you may want to lessen your risk exposure to protect the nest egg you have worked so hard to build. Reviewing your plan regularly will give you peace of mind and make sure you’re on course to achieve your retirement goals.

6) Borrowing against your 401k

Borrowing from your 401(k) account is a big mistake for one of two reasons. The first reason is you’ll make less money in your 401(k) account. If you choose to take money out of your account, you’re missing the opportunity of the funds growing with the market.

The second reason is you may end up paying more in penalties and taxes. If you find you’re unable to pay back your loan in the allotted amount of time, it will become a distribution. This means you will have to pay a 10% penalty as well as income tax on the full loan amount.

If you’re not careful this could be financial devastating. That’s why you should have an emergency or rainy day fund in place to handle unexpected expenses. Borrowing against your 401(k) should be an absolute last resort.

7) Not considering a Roth 401(k)

You contribute to a traditional 401(k) with pre-tax dollars. This means that when you go to take distributions in retirement, you must pay income taxes. Around age 71 the IRS will be force you to start taking withdrawals from your 401(k) called “required minimum distributions”. If your account balance is high this will raise your taxable income substantially, which in turn increases your marginal tax rate, which then eats into social security and pension benefits.

Today many companies offer Roth 401(k) plans. These plans allow you to contribute with after-tax dollars. Since you’ve already paid your taxes, all distributions are tax-free.

If you think you will be in a higher tax bracket come retirement, this may be a viable option for your 401(k) plan. Speak with your Human Resources Department for details and determine if this option is right for you.

8) Not considering your tax burden in retirement

According to a Schwab Retirement Plan Services Inc. survey, only 38% of 401(k) plan participants anticipate taxes in retirement. If you’re unaware you have to pay income taxes on all distributions in retirement, this could lead to significant budget challenges.

It’s important to calculate potential taxes into the total amount you will need to save for retirement.

The bottom line

If your company offers a 401(k) plan, it is smart to take advantage of this retirement savings option. Take the time to meet with a financial professional and your Human Resources Department to understand the ins and outs of the plan offerings. The more you understand your plan, the better you can maximize this opportunity to save for the future.

If you’re unsure of how much you need to start saving, try using our Retirement Saving Calculator to get you on the right track toward financial security.


The post Are You Making These 8 Costly 401k Mistakes? is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Net Worth, Risk Reduction
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