Your 401(k) is likely one of your most important financial assets for retirement. But it’s surprisingly easy to make mistakes that could jeopardize decades of saving and investing. From misunderstanding risk to ignoring tax strategies and failing to adjust when life circumstances change, small oversights in your 401(k) management can have huge consequences.
In this article, we’ll explore some of the most critical 401k mistakes people make—especially in times of market volatility—and what you can do to avoid them.
Mistake #1: Panicking During Market Volatility
Market downturns are inevitable, but panicking and selling off investments at a loss can lock in those losses forever.
During times when the market is down—like 10% or more—it’s tempting to get out to protect what you have left. But historically, the S&P 500 has always rebounded over time. Instead of selling in fear, you can actually use downturns as strategic opportunities. For example, converting traditional retirement funds into a Roth IRA during a dip can reduce your tax liability, since the value is temporarily lower.
Why This Matters:
By converting during a downturn, you’re paying tax on a smaller amount. When the market rebounds, all future gains are tax-free in your Roth IRA. It’s like getting a discount on your taxes.
Mistake #2: Ignoring Roth Conversion Opportunities
One of the smartest moves you can make in a down market is a Roth conversion, especially if your investments are temporarily beaten up.
Let’s say your income puts you in the 12% tax bracket. You might be able to convert, for example, $26,000 from a traditional IRA to a Roth IRA and only pay 12% tax on that amount. When the market recovers, those funds grow tax-free in your Roth.
Tip:
If you’re 62 and wondering if it’s too late to do a Roth conversion—it’s not. Most advisors recommend Roth conversions well into your 70s depending on your estate size. The sooner you act, the more potential you have for tax-free growth.
Mistake #3: Keeping All Retirement Funds in Risk-On Investments
One of the biggest risks you can take with your 401(k) is failing to protect part of your portfolio from market downturns, especially as you get closer to retirement.
Many people keep their 401(k) invested fully in stock-heavy options or target date funds. While these may work in your early career, they can be dangerous as you near retirement.
Why Target Date Funds May Fail You:
Target date funds were designed as “set it and forget it” solutions. But in 2022, many target date funds experienced heavy losses—far more than people expected given their proximity to retirement. Even the so-called “stable value” funds aren’t without risk. If inflation is at 5% and your stable value fund earns 1%, you’re still losing purchasing power.
Mistake #4: Not Using an In-Service Withdrawal When Eligible
If you’re over age 55 and still working, you may qualify for an in-service withdrawal, which allows you to roll money out of your 401(k) without penalties. Most people don’t realize this option exists.
Here’s how it works:
- You can take a portion of your 401(k)—say $500,000 of an $800,000 balance—and move it into a safer, more customized retirement income plan.
- The remaining $300,000 can stay in the 401(k), allowing you to continue contributing and capturing the company match.
- This strategy creates two buckets: a safe bucket for guaranteed income, and a risk bucket for continued growth.
This diversification can help protect you against future market crashes while still allowing upside potential.
Mistake #5: Not Planning for Income in Retirement
Most people focus solely on how much they’ve saved—but not on how that money will generate income when the paycheck stops.
That’s a critical mistake. Once you retire, you no longer have a salary to fall back on. Your emotional reaction to market volatility becomes heightened, because that money is now your life raft.
One smart move is to put a portion of your funds into a plan with guaranteed income—like an annuity with a bonus credit and guaranteed growth rate. This income can cover your basic expenses (housing, utilities, food, healthcare), while the rest of your portfolio can be invested more aggressively for growth.
Mistake #6: Being “Too Aggressive” Without Realizing It
Many pre-retirees believe they’re okay with market risk—until the market drops and their accounts fall 10% or more. If that kind of decline gives you anxiety, you may not be as aggressive as you think.
The reality is, during your working years, you had two safety nets:
- Your job/income
- Your retirement account
But once you retire, you only have one. If you lose 25% in the market now, there’s no new paycheck coming in to help you recover. This emotional shift means many retirees need a different, more balanced approach to investment risk.
Mistake #7: Not Diversifying Your Strategy
You don’t have to go all-in on risk or all-in on safety. A hybrid approach can work best:
- Risk-on bucket: for long-term growth
- Risk-off bucket: for guaranteed income and basic needs
By running multiple planning scenarios—risk-on, risk-off, and hybrid—you can see what works best for your unique situation. This kind of comprehensive retirement planning can reveal blind spots and help you make informed decisions with confidence.
Mistake #8: Stopping Contributions or Skipping the Company Match
Even if you make changes to your portfolio or pull some money out of your 401(k) through an in-service withdrawal, don’t stop contributing—especially if you’re getting a company match.
Think of the match as free money. If you’re 55 and still working, you’re likely going to continue for another 5–10 years. That gives your investments time to recover and grow, especially if you’re using a diversified strategy.
Mistake #9: Believing “What Worked Before” Will Work Again
Just because your investments performed well during a 14-year bull market doesn’t mean they will continue to do so in the future. Market conditions have changed, and so have your circumstances. If you’re no longer working, you no longer have control over when to retire—and you’ve lost the buffer of a steady paycheck.
That means it’s time to reassess. You may need to lower your exposure to risk, reevaluate your withdrawal strategy, or reposition your assets for better tax efficiency.
Top 401k Mistakes That Could Ruin Your Retirement – Final Thoughts
It’s not enough to know these strategies—you need to act on them. Whether you’re five years away from retirement or already in it, the decisions you make today can determine your financial security for the rest of your life.
Start by:
- Reviewing your 401(k) options
- Exploring Roth conversions when the market is down
- Checking if you qualify for an in-service withdrawal
- Building a balanced income plan with both risk and safety components
Retirement is too important to leave to chance. By avoiding these top 401(k) mistakes, you can help ensure that your savings last as long as you do—and that you can enjoy the retirement you’ve worked so hard for.
Also read: Pay Less Taxes Using This Down Market Strategy!
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