With retirement costs growing increasingly expensive, it's all the more crucial that workers take steps to save aggressively during their careers. And if you have a 401(k), you're in luck, because these plans come with much higher annual contribution limits than IRAs.

That said, if you're not smart about the way you save in your 401(k), you could end up falling seriously short on income when the time comes to retire. As we approach a new year, here are four 401(k) mistakes you should pledge to avoid at all costs.

401(k) statement


1. Waiting too long to start funding your account

It's estimated that just 32% of the total workforce is saving in a 401(k) despite the fact that 79% of employees have the option to do so. If you've yet to start contributing to your company's plan, now's the time to get started. Or, to put it another way, if you wait too long to begin saving, you'll lose out on key years of investment growth.

The following table highlights the difference between saving for retirement early on in one's career versus procrastinating:

If You Start Saving $300 a Month at Age:

Here's What You'll Have by Age 65 (Assumes an Average Annual 8% Return):












In the above scenario, giving yourself a 40-year savings window would result in an impressive $932,000 for retirement and at an out-of-pocket cost of just $144,000. That's quite the gain. But as you can see, the longer you wait to fund your 401(k), the less you stand to retire with.

2. Not snagging employer matching dollars

Of those employers who do sponsor a 401(k), more than 90% offer some sort of financial matching incentive. Yet a good 25% of workers don't contribute enough of their own money to take advantage of it.

If you're not capitalizing on a company match, you're really just throwing out free money. It's as simple as that. Typically, you don't need to get anywhere close to maxing out your 401(k) to snag some matching dollars, so if your ability to save is limited, at the very least, find out what it takes to get your full match and put in just enough money to collect it.

Also, remember that when you forgo a company match each year, you're not just losing out on that money itself; you're also missing out on associated growth. So don't just think about the $1,000 or so you might give up this year by not contributing to your 401(k); consider what that cash could grow into between now and retirement.

3. Choosing costly investments

When it comes to 401(k)s, not all investments are created equal. Just as performance can vary from one fund to another, so too can fees fluctuate based on where you choose to put your money. The problem, however, is that a whopping 92% of Americans don't realize how much they're paying in 401(k) fees each year. If you're one of them and you're not careful, you could end up losing out on some serious cash in your lifetime.

The Center for American Progress estimates that the average American worker who begins earning a median salary at age 25 will lose a total of $138,336 in 401(k) fees over time. Higher earners have even more to lose. Those who start earning $75,000 at age 25 will pay over $340,000 in total lifetime fees. Ouch.

If you don't want to throw money away on fees, look at your investments and get a sense of how much you're forking over. Then, consider unloading some costlier mutual funds and replacing them with index funds, whose fees are typically much lower and whose performance tends to be on par with funds that are actively managed.

4. Playing it too safe

Nobody wants to save money just to lose it all to some bad investments. But if you're too cautious about how you invest your 401(k), you may fall short on income down the line.

Now if you've been playing it safe thus far, you're not alone. A good 60% of Americans are saving too conservatively for retirement by focusing their efforts on avoiding losses rather than maximizing growth. But if you don't get a little aggressive, you could lose out on the sort of returns that spell the difference between a cash-strapped retirement and a comfortable one.

In the above example, we saw that $144,000 in contributions could grow into $932,000 over 40 years once we applied an average annual 8% return, which is comparable to the stock market's average. But watch what happens when we apply a more conservative 5% return. Suddenly, that ending balance drops to $435,000 -- still decent but not nearly as impressive as our previous figure.

If you're relatively young (say, under 50), then there's really no reason to shy away from stocks in your 401(k). Even older workers in their 50s should be invested in stocks, though perhaps to a slightly lower degree. Otherwise, you risk losing out big-time.

The start of a new year is a good time to get your finances in order, and that includes your retirement savings. Take steps to avoid these 401(k) mistakes, and with any luck, you'll set the stage for a healthier financial future.