If your employer offers a 401(k) match and you are not contributing enough to capture the full match, you are leaving guaranteed money on the table, not potential or projected money, but guaranteed money. There is no other investment available to you that offers an immediate 50% or 100% return before the market does anything.
The 401(k) is the most powerful savings vehicle available to most working Americans, and a lot of people barely understand how it works. Here is what you actually need to know.
What a 401(k) is
A 401(k) is a tax-advantaged retirement account offered through your employer. You contribute a percentage of your paycheck, pre-tax, which reduces your taxable income for the year. The money grows tax-deferred, meaning you do not pay taxes on the gains until you withdraw the money in retirement. At that point, withdrawals are taxed as ordinary income.
The 2026 employee contribution limit is $23,500. If you are 50 or older, there is a catch-up provision that allows additional contributions. Verify current limits at IRS.gov. These adjust annually for inflation.
The employer match: the part you cannot afford to leave
Many employers match a portion of your contributions. A common structure is 50% match on up to 6% of salary. That means if you earn $70,000 and contribute 6% ($4,200), your employer adds $2,100. That is $2,100 in free compensation that disappears if you do not contribute enough to trigger it. It is part of your compensation package. Not taking it is equivalent to turning down part of your salary.
Always, always, always contribute at least enough to capture the full employer match. This is the one piece of financial advice that applies to virtually everyone. Do this before anything else: before extra debt payments, before building up savings, before any other investment. The match is a guaranteed return that nothing else can beat.
My wife and I both started maxing out our 401(k) contributions from our first real jobs, from day one. It wasn't a dramatic decision. We just got used to living on what was left after the contribution came out, rather than deciding what to contribute based on what felt comfortable to give up. Once it's automatic and it's the first thing that happens to the paycheck, you stop noticing the money was ever there.
What to invest in: the easy button
Most 401(k) plans offer a target date fund, and for beginners this is the right starting point. A target date fund automatically manages your asset allocation based on when you plan to retire. If you are 25 and plan to retire around 2065, you pick the 2065 fund. It will hold mostly equities now, since you have decades to ride out volatility, and gradually shift toward bonds and fixed income as you approach retirement.
Target date funds are not perfect. They charge slightly higher fees than a bare index fund, and the glide path assumptions may not match your exact situation. But for someone just starting out, the simplicity is worth more than optimizing around the edges. Pick the fund closest to your retirement year and move on.
Fees matter more than most people realize
The expense ratio of your fund choices is the annual fee deducted from your returns. The difference between a 0.05% expense ratio and a 1.0% expense ratio sounds small. Over 40 years of compounding, it is not.