Is Your 401(k) Sabotaging Your Million-Dollar Nest Egg?

Market volatility has investors nervous about their 401(k) retirement accounts. If social media comments are accurate, many have reduced their payday contributions to lower risk. As Daniel Milan, managing partner at Cornerstone Financial, told Kiplinger "It’s the first time in a while" that his clients are asking “if I reduced it or made a change, how would it affect my long-term financial road map?" 

However, Kiplinger reports that lowering your 401(k) retirement contribution is a major mistake that could end up costing you millions in your senior years. And Kiplinger offers several reasons why you should stay the course and keep growing that lifetime nest egg.

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At the top of the list: reducing your contribution will limit your lifetime earnings potential. It's even worse when employers match the typical 3% to 4% of those contributions because it's essentially "free money" going into your account. Compounding interest also affects the nest egg. Kiplinger explains that interest earned on an investment is added to the principal amount, and then future interest is calculated on this new, larger amount. This compounding effect can repeat for months or years."

The interval in which the contribution is lower also impacts net worth at retirement. Active investors won't do much damage if they lower contributions for a few months, waiting for the clouds to pass. However, there will always be challenges and, if you don't restore that contribution quickly, it will impact the benefit of compounding and potentially cost you thousands in lost wealth. 

It's human nature that old habits die hard. It can take years to get into a disciplined investment mindset, delaying immediate gratification and setting aside the maximum retirement contribution each pay period. As Boldin Financial Coach Nancy Gates tells investors, "If you contribute less, you are losing that habit" and, more importantly, "if you stop, you may never go back to it." 

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You'll also miss out on growth opportunities. Market wisdom tells us to "buy low and sell high."  But reducing contributions during market corrections, and even bear markets, does the exact opposite. Kiplinger notes that stocks losing ground tend to go back up and, if you lower your 401(k) contribution during the decline, you'll make less money when markets appreciate again.

The next reason isn't obvious to many investors. Contributions to 401(k) retirement accounts lower your baseline salary, which may also lower your tax bracket. If you're unsure, consult with a financial professional or visit a tax website and play with the calculators. Side note: Roth individual retirement account contributions are made after that money is taxed so your bracket is already set.

Finally, lowering contributions could force you to work longer, perhaps well past your mid-60s, because you haven't accumulated enough wealth to retire comfortably. Kiplinger calculates that, if a 50-year-old with a million or so in the account reduces the annual contribution from $27,500 – the 2025 max for the age bracket – to $12,000, the account will lose $600,000 or more over 20 years. That could make all the difference as you grow older.

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