The Biggest 401(k) Mistake Isn't What You Think -- and It's Easier to Fix Than You May Realize

If you have access to a 401(k) through your job, you have a prime opportunity to build a solid retirement nest egg. That's because 401(k)s come with higher annual contribution limits than IRAs.

Funding a 401(k) is also seamless, since it happens via payroll deductions. This allows many savers to stay on track.

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But if you're going to participate in a workplace 401(k), it's important to manage your savings wisely. And that means avoiding a key mistake.

Under-funding your account is a move you might regret

You might think that the biggest 401(k) mistake you can make is choosing the wrong investments. The reality is that it's important to not invest too conservatively in your 401(k) and not lose too much money to fees. But broad market index funds, which are generally a mainstay of 401(k)s, can help solve both problems.

Rather, the biggest 401(k) mistake you might make is under-funding your account.

A 2025 Morgan Stanley survey found that 39% of workers are reducing their 401(k) contributions, largely due to economic impacts and concerns. And if you've done the same recently, or haven't ramped up your savings rate in years, you may have a good reason.

Inflation has been a beast in the wake of the covid-19 pandemic. And it may be making it difficult to find money for your 401(k). But if you under-fund your 401(k), even for just a few years, it could impact your long-term finances in a serious way.

Let's say you reduce your 401(k) contributions from $5,000 to $2,000 this year as well as the following year. All told, you're putting in $6,000 less.

But if you're 35 years away from retirement at that point, and your portfolio gives you a yearly 8% return (which is below the stock market's average), you could end up with almost $89,000 less due to lost growth. Ouch.

That's why it's important to fund your 401(k) steadily and try your best not to reduce contributions.

How to keep your 401(k) well-funded

Of course, it's not easy to find money for your 401(k) when you're trying to manage mortgage payments, rising gas prices, and other expenses. But a few tricks might help you keep your savings rate strong.

First, make sure you're claiming your workplace match in full each year. That's free money to snag.

Secondly, put yourself on an actual budget. There are apps you can use to seamlessly track your expenses without having to obsess over a spreadsheet. That could lead to more mindful spending -- and more generous 401(k) contributions.

Finally, ease your way into the gig economy. You may find that working just a few extra hours a week makes it possible to ramp up your retirement savings rate.

Choosing the right 401(k) investments is definitely important. But if you don't contribute enough to that account, you might fall seriously short of your savings goals. So it's important to do what you can to keep those contributions steady and, if possible, increase them year after year.

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