Editor’s Note: Here’s a reality check: your 401k could be the most powerful tool in your retirement arsenal, or it could be a financial landmine waiting to blow up your golden years.

Sure, employer matches and tax breaks sound great, but only if you know how to play the game right. Many people, however, are unintentionally sabotaging their future financial security.

Let’s dive into the common 401k blunders that could cost you big…and how to set things right before it’s too late.

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1. You’re Not Contributing Enough
   

One of the biggest mistakes people make with their 401k is not contributing enough. A corollary to this mistake is starting too late (see mistake number eight).

Your 401k is a powerful tool for building a secure retirement, but it only works if you’re using it wisely.

The Fix: Aim to increase your contributions each year, especially if you receive a raise or bonus. Initiate a percentage that feels manageable, and gradually increase it over time. Many 401k plans offer an option to automatically increase contributions annually. If it’s available, I strongly suggest you use it.

Starting to save for retirement in your 20s can make a significant difference, setting you up for a more secure financial future. If possible, aim to save the equivalent of your annual salary by age 30, letting compounding work its magic from an early start.

In your 30s, try to grow that balance to three times your yearly income by 40; by your 50th birthday, work towards having six times your salary saved. As you enter your 60s, aim for around eight times your income. These milestones can help keep you on track for a comfortable retirement.

Many people, however, struggle to meet these targets, so it’s vital to regularly monitor your savings and look for opportunities to increase your contributions. Consistent contributions and regular reviews of your retirement portfolio will make a powerful impact over time.

As retirement draws closer, consider rebalancing your investments to ensure they align with your evolving goals and risk tolerance. Starting early, saving steadily, and adjusting when necessary can help you reach retirement with confidence.

2. You’re Ignoring Asset Allocation

Asset allocation, i.e. the balance of stocks, bonds, and other investments in your portfolio, is essential for managing risk and returns. A common mistake is either being too conservative (especially among younger investors) or too aggressive (often among older investors approaching retirement).

The Fix: Revisit your allocation based on your age, risk tolerance, and retirement goals. Generally, younger investors should have more exposure to stocks for growth, while those closer to retirement might want more bonds for stability. Many 401k plans offer target-date funds, which automatically adjust asset allocation as you approach retirement.

3. You’re Paying High Fees

Investment fees can take a significant bite out of your retirement savings, especially if you’re not paying attention to them. High-cost funds eat into your returns, and over time, even a 1% fee difference can have a major impact on your final balance.

The Fix: Look at the expense ratios of your 401k investments. Many plans offer low-cost index funds that track major market indexes with minimal fees. If your plan has limited options, consider discussing it with your employer or HR team to see if they can add lower-cost options.

4. You’re Borrowing from Your 401k

Many 401k plans allow you to borrow against your savings, but it’s generally not advisable unless you’re in a true financial emergency. When you take a loan, you lose the power of compounding interest on the money you’ve borrowed, which can dramatically reduce your retirement savings.

The Fix: Try to create an emergency fund outside of your 401k to avoid tapping into your retirement savings when unexpected expenses arise. If you do need to take a loan, have a clear plan for paying it back as quickly as possible.

5. You’re Not Rebalancing Regularly

Market fluctuations can cause your portfolio’s asset allocation to drift over time. For instance, if stocks perform well, you might end up with a higher stock allocation than you initially planned, which could expose you to more risk than intended.

The Fix: Make it a habit to rebalance your 401k at least once a year. This can be done by shifting funds from overperforming assets (like stocks after a good year) to underperforming assets (such as bonds). Some 401k plans even offer automatic rebalancing options.

6. You’re Cashing Out When You Change Jobs

When changing jobs, many people make the mistake of cashing out their 401k balance. Cashing out incurs income tax and potentially a 10% early withdrawal penalty if you’re under 59½. This move can be devastating to your long-term retirement savings.

The Fix: Instead of cashing out, consider rolling over your 401k into an Individual Retirement Account (IRA) or transferring it to your new employer’s 401k plan if they allow it. This keeps your retirement savings growing tax-deferred.

7. You’re Not Taking Advantage of Employer Matching Contributions

Not all employers offer matching contributions, but if yours does, it’s essential to take full advantage. Employer matching is essentially free money, and by not maximizing it, you’re leaving money on the table.

The Fix: At a minimum, contribute enough to receive the full employer match. If you’re unsure of the matching policy, check with your HR department. Remember, not taking full advantage of a match is like declining a portion of your salary.

8. You’re Waiting Too Long to Start

One of the most damaging mistakes people make is waiting too long to start contributing to their 401k. This can happen because people are focusing on paying off student loans, credit card debt, or other financial priorities. However, the sooner you start saving, the more time compound interest has to work in your favor.

While retirement may seem far off, the earlier you start saving, the more time your money has to grow. The experts at Investing Daily recommend saving 10%-15% of your income for retirement, yet many people contribute only enough to get the employer match, typically 3%-6%

Sad fact is, the average amount of retirement savings of most Americans is woefully inadequate. Take a look at the following chart. If you’re approaching the age of 70, do you think a nest egg of less than $280,000 is enough to retire comfortably? I didn’t think so.

The Fix: Start contributing to your 401k as early as possible, even if it’s a small amount. The power of compound interest makes a significant difference, especially in the early years. Even small contributions add up over time.

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Avoid these eight common mistakes by contributing enough, keeping an eye on fees, diversifying your portfolio, and resisting the temptation to cash out early. With regular check-ins and some strategic adjustments, you can maximize the potential of your 401k and take steps toward a comfortable retirement.

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John Persinos is the editorial director of Investing Daily.

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