Four 401(k) Mistakes to Avoid While Saving for Retirement

Now’s a good time to reflect on how to optimize your 401(k) savings and ensure you’re not making any of these common mistakes.

A mason jar labeled 401(k) sits on the desk of a woman working on a computer in the background.
(Image credit: Getty Images)

401(k) account balances have risen for retirement savers of every generation for the third straight quarter. This good news for hardworking Americans was revealed in Fidelity Investments’ Q2 2023 Retirement Analysis. Fidelity found that the overall average 401(k) account balance in the second quarter of this year increased to $112,400, up 8% from five years ago and 39% from 10 years ago.

Members of Generation Z experienced the largest year-over-year increase (66%) in 401(k) account balances during the quarter, followed by Millennials with 24.5%, Gen Xers with 14.5% and Baby Boomers with 6.3%.

For this positive trend to continue, 401(k) plan participants need to take the time to understand how to take full advantage of their plans and, ultimately, optimize their savings.

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Today (Sept. 8) is National 401(k) Day. This annual tribute gives American workers the opportunity to pause and reflect on how they can utilize their 401(k) savings accounts to achieve a financially secure and comfortable retirement. Below is a list of common mistakes that they should avoid while saving for retirement.

1. Don’t rely on your 401(k) for emergency expenses.

In order to fully maximize your 401(k) contributions, keep a “rainy day fund” with savings you can access in the event of an emergency. Ideally, you should begin setting aside money outside of your 401(k) for meeting emergency expenses before you enroll, or are automatically enrolled, in your 401(k) plan. This way, you won’t have to make premature withdrawals from your 401(k) account, which can reduce your retirement savings and income.

2. Don’t prematurely withdraw your savings — keep them incubated in your 401(k) for as long as possible.

When you withdraw savings from your 401(k) account before age 59½, you are subject to taxes and could face penalties on what you remove. Even more important, you also lose the compound interest that the withdrawn savings would have accrued had the sum stayed invested in your 401(k). In the same vein, if you switch jobs and have trouble rolling over your 401(k) savings from your old account into your previous employer’s plan, you’re better off keeping your savings invested there instead of cashing out the balance.

3. Start saving early, but don’t try to time the market.

The biggest advantage that retirement savers have is Father Time. The longer you save in a 401(k) account, the longer your hard-earned savings have to grow. At the same time, some participants can fall into the trap of being too aggressive with their retirement savings in an effort to time the market. Most participants aren’t market experts — and even the so-called experts can be wrong about the right time to buy or sell assets.

Instead, a more prudent approach would be to give your savings the time they need to grow in your 401(k) account as part of a thoroughly mapped out financial plan. This is a much safer bet for ensuring you have enough money when you are old enough to retire. Any questions you have about market timing and conditions should be discussed with a certified financial professional who is trusted by your family and friends — never make major 401(k) buying and selling decisions on your own.

Working with a professional who understands your goals and risk tolerances, and has collaborated with you on a well-laid-out financial plan, is the best way to attempt to protect your 401(k) and other retirement savings against market downturns.

4. Don’t miss out on your employer’s full match.

The SECURE 2.0 Act of 2022 only expands automatic enrollment for 401(k) plan sponsors. If you are automatically enrolled in your plan, you might as well take full advantage of what it offers. For example, make sure you find out the maximum employer match you can receive and how much you need to save in your 401(k) to become eligible.

Also, if you are automatically enrolled in your 401(k) plan, check to see that the employer match at which you have been enrolled isn’t less than what you’re entitled to receive. Even if it’s a difference of $10 a week in contributions, it can make a big difference when you’re old enough to retire.

Also, if you are automatically enrolled, check that the target date fund in your 401(k) account is the right fit for the income you need to save to meet your retirement goals. Furthermore, if your employer’s 401(k) plan offers access to guaranteed income solutions such as annuities, the full purchasing power of the plan itself will bring down the institutional fees you would otherwise be subject to if you invested in them outside of your plan.

401(k) plans have pretty much replaced pensions as the private sector vehicles for providing workers with income during retirement. Plan participants should take the time to understand how they can maximize their retirement savings through their 401(k) savings accounts, and be aware of common mistakes that could reduce their income in retirement.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Sean Murray, CFA
Head of Retirement, Envestnet

As the Head of Retirement for Envestnet, Sean plays a key role in the ongoing growth and alignment for Envestnet’s solutions for the workplace. Sean has over 25 years of experience in the financial services industry serving in a multitude of executive roles for some of the top firms in the asset management space. Prior to joining Envestnet, Sean was a Managing Director with BlackRock and led their Retail Defined Contribution Investment group while also serving on a variety of executive committees across the firm.