Maxing Out Your 401(k)? You May Still Be Leaving Money on the Table.
Key Points
Maxing out a 401(k) is a great way to build retirement wealth.
You may be losing out on money for your senior years by investing your 401(k) too conservatively.
Make a point to actively choose 401(k) investments so your money can work for you.
- The $23,760 Social Security bonus most retirees completely overlook ›
A lot of people struggle to contribute a few thousand dollars a year toward retirement savings. So if you've been maxing out your 401(k), you're clearly in a great place.
But while it certainly pays to contribute the maximum each year to your 401(k) plan if you have the means to do so, that doesn't guarantee that you'll end up with the savings balance you're hoping for. In fact, one big 401(k) mistake may be causing you to leave a boatload of money on the table.
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Are you playing an active role in your 401(k)'s investments?
Often, when you contribute to a 401(k) and don't choose specific investments, your money lands in a target date fund. These funds are designed to adjust your asset allocation over time, depending on how close to retirement you are.
Target date funds are unquestionably convenient. But that convenience can come at a huge cost.
See, target date funds tend to start dialing down stock exposure sooner than they have to. This conservative approach could mean losing out on stronger returns -- and falling short of your savings goals.
Plus, target date funds tend to charge high fees, known as expense ratios. Those can eat away at your returns over time, costing your money.
That's why instead of letting your 401(k) contributions land in a target date fund, you may want to play a more active role in choosing your investments. The options you land on should hinge on your tolerance for risk as well as where you are in your savings journey.
But let's say you're a good 30 years away from retirement. You may find that investing your 401(k) in an S&P 500 index fund makes more sense than sticking with a target date fund.
In that case, it will be on you to remember to start shifting into more conservative assets as retirement nears. But for now, there's no reason not to maximize growth in your retirement account.
Plus, index funds tend to come with much lower fees than target date funds. So there could be some savings there, too.
Don't assume that maxing out is enough
By maxing out your 401(k), you're taking a big step toward meeting your savings goals. But simply funneling money into your workplace retirement plan isn't enough.
It's just as important to make sure your money is working as hard as it can. That means choosing the right investments and not just defaulting to an option that may be convenient but puts you at risk of coming up short.
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