Does It Really Pay to Fund a 401(k) the Year Before You're Retiring?

If you start contributing money to a 401(k) plan as soon as you start working full-time, there's a good chance you'll end up with a nice balance as retirement nears provided you keep funding that account year to year.

Granted, you might switch jobs a number of times throughout your career. And each time you do, you might have to roll your 401(k) balance into your new employer's account. But if you keep doing that, and you keep contributing out of your paychecks, you may find that you have a generous 401(k) to tap once you're no longer working.

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In a 2024 report, Vanguard put the average 401(k) balance among Americans ages 65 and over at $272,588. But with proper planning and consistency, you can potentially do a lot better.

Imagine you start contributing $325 a month to your 401(k) plan at age 25 and do so until 65. If your portfolio gives you a yearly 8% return, which is a bit below the stock market's historical average, you're looking at a balance of $1 million.

But while it clearly makes sense to fund a 401(k) throughout your career, does the same hold true when you're on the verge of retiring? At that point, couldn't you just give yourself a break?

You may be inclined to stop funding your 401(k) the year before you retire. But before you halt contributions, look at the big picture.

There's limited upside at that point in time

We just saw that contributing $325 a month over 40 years could result in a 401(k) worth $1 million. But you'll notice that you're getting to $1 million at a cost of just $156,000 in out-of-pocket contributions ($3,900 per year x 40 years).

The reason you're able to end up with so much money in this situation is that you're enjoying many years of compounded returns in your 401(k). But money you invest the year before retirement might have limited growth. So you may be inclined to stop funding your 401(k) that year if you're happy with your balance.

Is that a good idea? Maybe. But you'll want to ask yourself two things:

• Am I giving up a large employer match?
• Will the money I don't contribute do something meaningful for me this year?

Say you normally put $3,900 a year into your 401(k), but your employer matches all of that. If you don't contribute, you lose out on that free money.

On the other hand, let's say you want to take a trip and could use an extra $4,000 or so to pull it off. If the trip is one you don't want to wait on, that means there's an immediate benefit to using your money for travel instead of saving it in your 401(k). So that could be a good reason to not contribute.

A decision to consider carefully

Skipping a year of 401(k) contributions is generally a bigger deal early on in your career than at the tail end of it. If you miss a year of 401(k) contributions at 30 and retire at 65, you're giving up 35 years of growth on whatever sum you would've funded your account with.

But do remember that with your 401(k), you're not withdrawing the entire sum the moment you retire (or at least not ideally). So it's not totally accurate to tell yourself that you won't be missing out on too many gains from whatever funds you might put in the year before you retire.

All told, this is one of those situations where you could go either way. A last-minute 401(k) contribution could be helpful to your retirement, but you may not necessarily be doomed without it. But it's a decision to think through carefully, even though it might seem like the consequences will be fairly minimal either way.

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