Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

This Is the No. 1 Retirement Mistake You Can Make, a Survey Says

By Katie Brockman - Nov 2, 2019 at 4:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

About 72% of Americans call it a blunder.

Everyone makes mistakes, especially with finances. It's nothing to be ashamed of, as long as you recognize it and correct them before they become problematic. If you wait too long (or if you don't realize you're making a mistake at all), you could be putting your finances in jeopardy.

So what do Americans think is the No. 1 retirement mistake you can make with your money? It involves your 401(k).

Man with coins falling through his fingers

Image source: Getty Images

Why a 401(k) is a vital retirement tool

The biggest financial mistake you can make is not taking advantage of your 401(k), according to a survey from TD Ameritrade. A whopping 72% of the survey participants said not investing in a 401(k) is a mistake, with roughly 52% of those people admitting it's a major one.

Why is not putting money into a 401(k) considered a big blunder? Because it's one of the best retirement saving tools there is.

There are several reasons a 401(k) is one of the best places to stash your savings. For one, your employer may match your contributions up to a certain percentage of your salary. These matching contributions are essentially free money, so it's smart to take full advantage of them.

Second, 401(k) plans have much higher annual contribution limits than other types of accounts. As of 2019, you can contribute up to $19,000 per year in your 401(k), plus an additional $6,000 if you're 50 or older. IRAs, on the other hand, have a yearly contribution limit of just $6,000, plus an extra $1,000 for those 50 and up. Although most people can't afford to max out a 401(k), it's nice to have a higher limit in case you want to supercharge your savings.

Another perk of investing in a 401(k) is that it's relatively easy to get started and save consistently. Oftentimes, employers allow you to automatically transfer a portion of each paycheck straight into your retirement account. It makes it easy to save and can help avoid the temptation of spending that money.

How to maximize your 401(k)

The first step to making the most of your 401(k) is to contribute at least enough to earn the full employer match. Not doing so means you're missing out on free money and the opportunity to significantly increase your savings.

Next, make sure you know what you're paying in fees. All retirement accounts -- whether it's a 401(k), traditional IRA, Roth IRA, etc. -- charge fees, but they aren't always obvious. You typically won't see a bill for the fees you owe, because the money is simply taken out your account balance. And you also can't expect to receive a statement telling you exactly how much you're paying in fees, so it's tough to tell how much of your contributions are going toward your savings and how much is being spent on fees.

The average 401(k) charges fees of around 1% of total assets under management, according to a report from the Center for American Progress. So if you have $100,000 in your account, around $1,000 per year is going toward fees. It's not unrealistic to end up paying tens or even hundreds of thousands of dollars in fees over a lifetime. In fact, the Center for American Progress also found that the average worker paying 1% in fees loses around $138,000 to fees over a lifetime. Raise that to 1.3%, and the loss jumps to around $166,000 over a lifetime.

To check what you're paying in fees, you can either talk to your plan administrator or dig through the fine print in your statements. The key figure to look for is the expense ratio, which tells you how much of your money is going to fees. If you find you're paying higher-than-average fees, it might be worth it to consider investing elsewhere. While you should still contribute enough to your 401(k) to earn the full match, it might be wise to invest the rest of your cash in an IRA that charges lower fees.

Investing in a 401(k) is one of the best ways to build a healthy retirement fund, so if you're not taking advantage of it, you could be putting your financial future at risk. And the more you know about how to maximize it, the better the chance you'll have of reaching your long-term financial goals.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.