The 401(k) Mistake That Could Cost You Millions in Retirement Savings

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Reducing your 401(k) contributions might seem like a good idea if cash flow is tight or if you are worried about the stock market's trajectory as we move through 2026.

You wouldn’t be alone. It’s something that weighed on investors' minds last year, when the stock market was whipsawing between highs and lows. A Morgan Stanley at Work study conducted in the spring found that 39% of employees surveyed reduced their 401(k) contributions due to the economy, and 67% reduced their overall savings rate across different products.

But that doesn’t mean you should, too. Reducing 401(K) contributions can cause more harm than good to your retirement savings. Read on to see how.

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401(k) contribution reduction dangers

1. It limits your lifetime earnings potential

Save early and often is the mantra for many financial advisers for good reason. Due to compounding, the more you save and the longer you're invested, the greater your balance will be over time.

With compounding, interest earned on an investment is added to the principal amount, then future interest is calculated on this new, larger amount. This process happens repeatedly over a set period, often months or years, depending on the investment.

Take a 50-year-old individual with $1.24 million in her 401(K) who contributes $32,500 a year ($24,500 is the 2026 yearly limit, plus up to $8,000 in catch-up contributions for those age 50 and older). Assuming a growth rate of 5.5%, her balance will grow to $4.75 million after 20 years, says Daniel Milan, founder, managing partner and CIO at Cornerstone Financial Services.

If she reduces her contributions to $12,000 a year, her balance after 20 years will be $4.04 million, about $660,000 less. “That’s not a small number,” says Milan.

What about this: Boldin, the financial planning tool company, ran two scenarios for Kiplinger.com for a married couple aged 45 with a 10% employee contribution and a 3% match. If one spouse’s contribution were stopped, the chances of saving enough for retirement would fall by 5%, and the estate would decline in value by $2 million at longevity age.

The longer you reduce contributions, the bigger the impact. If you reduce your contributions for six months, it won’t derail your retirement savings plans as much as if you kept a lower contribution rate for years.

“If it’s short-term in nature, that doesn’t have a major effect, but if something becomes the new normal or habitual, it can have a significant effect over 10 or 20 years because it decreases compounding,” says Milan.

2. You settle for less

The phrase "old habits die hard" couldn’t be truer. Once you set something in motion, it’s hard to come back. That’s particularly true when it comes to your 401(K).

If you reduce your contribution rate, chances are that will become your new baseline, which means you’re selling yourself short. The purpose of a 401(K) plan is to pay yourself first so you can live comfortably in retirement.

“If you contribute less, you are losing that habit,” says Nancy Gates, lead educator and financial coach at Boldin. “When you get a job, you are automatically enrolled up to a 3% or 4% match. You are not even thinking about it. If you stop, you may never go back to it.”

3. Miss out on growth opportunities

Buy low and sell high is the goal of most investors, but in volatile markets, many tend to do the opposite: Sell low and buy high.

If the markets have got you spooked into considering reducing your future 401(k) contributions, think again.

History has proven that stocks that fall tend to rebound. If you reduce your contributions when stocks are in decline, that’s less money that can benefit when the markets appreciate again.

Stocks recouped losses and then some after the dot.com boom and bust, the Great Recession and COVID. If you stay invested when markets are depressed, you can get more shares for your money.

4. You leave free money on the table

To reward you for saving for retirement, many companies offer a matching component with their company-sponsored 401(k)s. The employer commits to match a percentage of your contributions, typically, 3% to 4%.

If you lower your contributions below the 401(K) match, you're leaving free money on the table. Less money in your 401(k) means less money to benefit from compounding.

If you're determined to do it, Milan says to be mindful of the match.

“At the very least, we try to draw a hard line at whatever the match is,” says Milan. “Once you go below that, even in the short term, you are giving up free money that is part of your compensation package.”

5. It could push you into a higher tax bracket

If you're on the cusp of being in a higher tax bracket, contributing less to your 401(K) might push you over the edge. The income not going into your 401(k) tax-free will count as taxable income.

Gates says that if you still want to reduce contributions, make sure you aren’t lowering them so much that it pushes you into a higher tax bracket.

6. It could force you to work longer

While you might aim to retire at 65 or 66, reducing your 401(k) contributions for an extended period can easily derail that plan. The resulting shortfall could force you to delay your retirement or significantly adjust your lifestyle once you exit the workforce.

Take Milan’s example of the person who contributed $12,000 per year instead of $32,500 and ended up with $660,000 less by the time they retired. If you have $660,000 less in your 401(k), will you still be able to live comfortably in retirement? If not, you might be forced to delay retirement for a year or two, or more.

When it makes sense

Reducing your 401(k) contributions should be a last-resort lever you pull and only use in extreme cases. If you can’t pay your bills or have a lot of debt, it might prove prudent to tackle that first.

“When you are starting on a path of financial wellness, the first thing to do is make some income and pay expenses on time, every time. The next goal is to have an emergency fund,” says Gates.

“After that, the goal should be to pay off high-interest debt before saving for retirement. If you can’t pay your bills on time and have high-interest debt, pause contributions until you're at the right place.”

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.