5 Hard to Break 401k Habits

5 Hard to Break 401k Habits

Saving for retirement through a 401k plan provides excellent benefits – tax-deferred growth, employer matches, and more. However, some common pitfalls investors can fall victim to can seriously hamper your 401k performance. Awareness of these habits and intentionally avoiding them can help ensure your 401k works maximally for you over the long run.

Saving for retirement can seem straightforward – contribute to your 401k, receive your employer’s matching contribution, and watch your balance grow over time. However, many standard practices when managing these accounts can seriously hinder your returns. Certain habits undermine 401k performance and growth. Breaking free from these unproductive patterns is critical to maximizing your nest egg.

This article will explore the five most detrimental yet widespread 401k tendencies that can inadvertently damage your investment retirement plan if left unchecked. By understanding what practices to avoid, you can course-correct early enough to reach your long-term portfolio goals. We’ll review each habit and the preferred path forward so your 401k can set you up for the best odds for success.

Can You Avoid These 5 Hard-To-Break Bad 401(k) Habits?

  1. “Why start my 401k now? I have plenty of time.” – Not taking advantage of the time value of money and power of compound interest by starting to contribute early.
  2. “I’m getting the full match, so I’m saving enough.” The employer match indicates how much the company will contribute, not the right savings amount for you; it’s likely not enough.
  3. “Time’s up, and I’m done; I can cruise from here.” You think you can stop contributing as you near retirement without having a plan to know if you have saved enough.
  4. “What’s hot and what’s not? I need to know now.” – Trying to time the market instead of using a “set it and forget it” strategy.
  5. “The market’s in trouble; I want to protect my hard-earned savings.” – Getting too conservative with investments when nearing retirement instead of having an appropriate asset allocation for your age and time frame.

Keep reading for a deeper understanding of these bad 401k investing habits and how to avoid making these mistakes.

1. Not Starting Early Enough: The Time Value of Money

Beginning 401k contributions early when starting your first job out of college often gets deprioritized. After all, doesn’t retirement seem lightyears away when you’re just 22? However, this line of thinking overlooks critical financial principles – the time value of money and the immense power of compound growth over long horizons. The earlier you start saving, the more time capital has to grow and accumulate.

For example, Jim starts contributing $5,000 annually to his 401k from ages 22-29 and then stops. That’s just $40,000 total saved over eight years. But assuming a growth rate of 9% annually, by age 67, that original $40,000 could have grown to a whopping $1.8 million! Contrast that with Sally, who waits until 30 when she feels more financially established. She diligently then puts $5,000 into her 401k every year from 30 until age 67, for a total of $190,000 contributed. Yet at a 9% return, Sally’s balance only reaches $1.7 million by 67. The eight additional early years proved more potent than an extra $150,000 contributed to Jim’s ending balance due to the momentum of early compounding gains.

The implications are clear – even small, consistent contributions started in your early 20s can pay huge dividends, thanks to compounding. Every year, the delay cuts significantly into this growth, though. Prioritizing establishing even modest 401k contribution habits straight out of college can meaningfully impact your retirement preparedness 40+ years later. I know this firsthand because I started at age 18, and it gave me such a headstart over all my peers, thanks to the compounding effect.

2. Relying Only on the Employer Match

One quick and easy habit companies try to encourage is contributing enough to your 401k to maximize employer matching funds. For example, if a company offers a 3% match, you should set aside at least that much, as that equals free extra money towards retirement. However, too many savers think that amount is sufficient for their needs. Many fall into the trap of “I’m getting the full match, so I’m saving enough.”

In reality, employer matches represent the minimum starting point, not an endpoint target. The match percentages and ceilings companies set have no direct relation to your income, lifestyle desires, or the amount you may need to replace to maintain your living standards decades into the future. For most earners, relying solely on the typical 3-6% 401k match will result in saving too little retirement funds.

Reaching your ideal savings rate necessitates calculating your unique retirement income needs, risk factors, and more. This rate commonly falls between 10-15% for average savers. A financial advisor can assist in mapping out your savings goalposts over time, ensuring you stay on track for retirement. The key is not just automatically defaulting to the standard 401k match level without further personal analysis, as temptingly easy as that may be.

3. Coasting Too Early in the Home Stretch

As retirement years are finally near, 401k contribution fatigue can set in. After 30+ years of diligent saving, the finish line is in sight. Some may be tempted to decrease or even stop 401k payments, feeling their work is mainly done. They want to coast across the finish, enjoying the home stretch. But slow that roll. Without a clear picture of total savings needs and whether you are on pace, drifting prematurely can derail your retirement.

Unexpected health issues, market shifts, increased lifespans, inflation, or simply desiring to maintain your lifestyle can all mean needing more retirement funds than imagined. Run your numbers with an advisor to confirm your status before assuming you can completely curtail all retirement funding inflows. Also, give close consideration before suspending 401k payments entirely in those final few working years and, in doing so, surrender employer matching funds left on the table that compound over additional years.

If ready to redirect retirement dollars as you near the end of your career, consider other savings vehicles first – paying down mortgages faster, maximizing Health Savings Account (HSA) contributions to offset future healthcare costs, or saving towards long-term care needs. Just don’t forfeit ongoing growth and employer incentives without good cause. Every saved dollar counts.

4. Getting Caught Up in Investment Fads

When you see your 401k statements fluctuating month to month, keeping emotions in check gets difficult. Panic can trigger reactionary tweaks and changes to protect your hard-earned money. Some obsess over investing trends and sectors and try timing markets to maximize returns. Others move heavily towards conservative funds at the first sign of volatility. These knee-jerk responses usually fail to pay off, though. You need a quantified investing system with an edge, not your own opinions and predictions.

Attempting to speculate on sector funds like precious metals or jumping on bandwagons like new tech sector stocks rarely succeed long term unless the investments are made inside a strategy with a positive expectancy. Trying to correctly time when markets will rise, peak, and fall is practically impossible to do consistently, too. Even the rare times you guess right fail to compensate for the missed upside when markets rebound before you re-enter. This realm is best left to professional traders, not to retail investors inside their 401(k) plan.

Staying invested through ups and downs pays off far more over complete market cycles. A 2022 JP Morgan analysis showed that missing the stock market’s ten best days between 2001 and 2020 cut overall returns in half. If you missed the 40 best days, you lost money over those 20 years.[1]

Rather than reacting to each headline, create an intentional asset allocation that aligns with your risk appetite and goals. Rebalance along the way as needed, but avoid reactionary investment changes. Time in the market wins over timing the market for long-term investors over almost all 20-year to 30-year periods in the US stock market indexes.

5. Becoming Too Conservative Too Soon

As retirement nears, protecting your nest egg likely feels more urgent than ever. After decades of accumulating, suffering significant losses right toward the finish line poses a devastating setback. To safeguard against this, some shift dramatically towards conservative asset allocations years in advance – moving most funds to bonds, money markets, annuities, etc. However, research shows that excessive conservatism jeopardizes outcomes.

Yes, mitigating volatility matters as you transition into withdrawal and spending mode. However, maintaining some calculated market exposure still provides the necessary growth to counteract inflation and sustain your long-term nest egg. Conservative portfolios struggle to keep pace with rising costs. If you prematurely forego meaningful growth years before retirement by shifting assets, you may find yourself financially strained later.

The key lies in developing a prudent and consistent asset allocation path over the 5-10 years pre-retirement. Work with a financial advisor to structure your investments into separate buckets – short-term spending needs, mid-term horizons, and longer-duration funds. This balance mitigates immediate risk while allowing longer-dated money to pursue growth in the market.

Key Takeaways

  • Initiate consistent contributions immediately when beginning your career to capitalize on exponential growth over long time horizons.
  • Employer matching dollars establish baseline savings rates and independently assess your retirement income needs for the ideal personal savings target.
  • Resist temptations to prematurely decrease savings as retirement nears without first confirming target savings are adequately funded.
  • Remain invested through market fluctuations; avoid reactionary investment changes and attempt to time entry or exit points outside an investing system.
  • Gradually change asset allocations over your final decade before retirement versus drastic immediate shifts to overly conservative holdings.


Retirement success requires proactively developing intentional long-term saving and investing strategies rather than basing decisions on emotion or short-term perspectives. Leverage time and compounding by prioritizing consistency. Seek expert guidance to create personalized plans outpacing standard rules of thumb. Temper risk appropriately as retirement nears while still pursuing growth. Committing to prudent habits today generates lasting payoffs tomorrow.

Staying aware of these common 401k pitfalls will serve your retirement savings well. Seek guidance to shape intelligent portfolio strategies, but avoid reactionary habits that can damage outcomes. Stick to the plan, and your future self with thank you.