401(k)s Explained: How I Learned the Hard Way and Why You Shouldn’t Wait to Start
Why 401(k)s Matter
For many Americans, a 401(k) is the standard retirement plan. It’s designed to help you retire comfortably without relying solely on Social Security. Unfortunately, I’ve seen friends and family struggle in retirement because they didn’t take advantage of this powerful tool. Often, it wasn’t laziness—it was simply a lack of knowledge about how 401(k)s work and the magic of **compound interest**.
My First 401(k) Mistakes
When I started working at Target, I was thrilled to learn about the company’s 401(k) plan, especially the **5% employer match**. Free money, right? I enrolled immediately.
But here’s where I went wrong: I treated my 401(k) like a piggy bank. I took out loans for vacations and short-term wants. What I didn’t realize was that I was wasting the most valuable asset I had—**time**. Every dollar I pulled out was a dollar that could have been compounding for decades.
It took years, and some tough comparisons with my peers’ account balances, to realize I had made costly mistakes.
Turning Things Around
Embarrassed but motivated, I increased my contributions and committed to never raiding my retirement account again. I also started talking to coworkers and friends about the importance of using their 401(k).
One of those conversations was with Cristian, a hardworking colleague who wasn’t contributing enough to get the company match. I explained how he was leaving free money on the table—and he enrolled right away.
What Is a 401(k)?
A **401(k)** is a retirement account that allows you to invest pre-tax or post-tax dollars into assets like stocks, bonds, and index funds. Contributions are usually made through payroll deductions, and many employers offer a **match**.
**Example:**
- Cristian earns $1,000 per week.
- He contributes 5% ($50) to his 401(k).
- Target matches that 5% with another $50.
- Total weekly contribution = $100.
That’s $50 of **free money** every week, which grows through compound interest over time.
Traditional vs. Roth 401(k)
- **Traditional 401(k):** Contributions are pre-tax, lowering your taxable income now. You’ll pay taxes when you withdraw at retirement (after age 59½).
- **Roth 401(k):** Contributions are made with after-tax dollars. Withdrawals in retirement are tax-free.
Which is better? It depends on whether you expect to be in a higher or lower tax bracket in retirement. [Read more about Traditional vs. Roth 401(k)s here].
Investment Options
Once you’re enrolled, you’ll need to choose how to invest your money. Two common options:
- **Index Funds:** These track a market index like the S&P 500, offering broad diversification and historically strong returns (around 10% annually).
- **Target Date Funds:** These automatically adjust your portfolio based on your expected retirement year—more aggressive when you’re young, more conservative as you near retirement.
Contribution Limits
In 2026, the maximum contribution for employees under 50 will be **$24,500**. Employer contributions (like Target’s 5% match) don’t count toward this limit.
So if Cristian maxed out his contributions at $24,500, plus received $2,600 from his employer match, his total annual retirement savings would be **$27,100**.
Even if you can’t max out, at least contribute enough to get your employer’s full match—it’s the fastest way to grow your retirement account.
Key Takeaways
- Start contributing as early as possible—the power of compound interest is unmatched.
- Always take advantage of your employer match—it’s free money.
- Avoid borrowing from your 401(k)—you’ll lose valuable growth time.
- Choose investments that align with your retirement timeline.
- Increase your contributions over time, especially as your income grows.
Final Thoughts
Investing for retirement is a long road, but with consistent contributions, discipline, and automation, you can build a future that doesn’t rely on Social Security alone. Everyone’s journey is different, but the most important step is to **start now**.