Why your employer’s retirement plan may cost you nearly 30% of your savings (and what to do about it)

It won’t make you wealthy overnight, or even in a decade.

However, a well-funded 401(k) plan can very well get you to work optional status over a career, or even in 20 years or less, as mine did for me.

That is, if fees don’t quietly eat away much of your retirement plan balance along the way.

The “1% Fee Rule”

Retirement researchers often highlight a striking rule of thumb.

A seemingly small difference in annual fees can have enormous long-term consequences.

According to the US Department of Labor (DOL), “…1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent [over a 35-year career].”

That’s not because the fees are so large in any single year. It’s because they compound.

Each year, fees slightly reduce your account balance. That smaller balance then earns less growth from that point on. Over the decades, that lost growth becomes far larger than the fees themselves.

That’s why even small differences in 401(k) costs deserve close attention.

Do Fees Really Vary By That Much?

Indeed, they do.

According to Cision PRWeb’s 2025 401k Averages Book, smaller plans pay more than larger ones. For example, $5 million plans’ average fees total 1.08%, while $50 million plans’ fees average a much lower 0.76%. 

What’s worse, they report that for $1 million plans with 100 participants, fees ranged dramatically, from a low of 0.87% to a high of 3.56%!

Why Does This Happen?

Large employers can pay dramatically lower retirement plan fees because they have negotiating power. With thousands of participants and up to a billion dollars or more in assets, they can access institutional share classes and command lower administrative costs. 

Small employers simply can’t do the same. And from the wide disparity in small-plan fee levels, some don’t even do as well by their employees as they could!

How Fees Can Injure Your Retirement Plan

Two workers can earn the same salary, save the same percentage, and even invest in the same asset classes, yet one may retire with hundreds of thousands of dollars more than the other!

Further, this may have nothing to do with their investment skills.

It might simply be because of where they work.

Imagine you and your friend are both 25 years old, and both earn the same $85,400 (roughly the median US household income, scaling Fed 2024 data up 2% per Motio research reported by Seeking Alpha).

You each contribute to your 401(k) enough to max out your respective employers’ dollar-for-dollar match up to 6% of compensation. Both of you pick a low-cost ETF that returns an annual average of 7% above inflation.

Your respective compensations track each other, both rising 1% a year faster than inflation. 

However, your friend works for a much larger employer, whose 401(k) plan manages over $1 billion in assets, so their annual fees are 0.27%, while you work for a small business whose 401(k) plan manages under $1 million, so your annual fees are 1.26%.

That 0.99% difference in annual fees sounds annoying, but surely it doesn’t rise to the level of concern mentioned above, right?

Wrong!

Adjusting for inflation, Figure 1 shows how much each of you would pay in 401(k) fees over your career, assuming you retire at Social Security’s current full retirement age of 67.

By retirement, your friend would pay a sizeable $92k.

You, on the other hand, would be taken to the cleaners, paying nearly four times as much, at $356k!

Figure 2 shows your respective 401(k) plan balances over time.

By age 67, your balance would be $2.17 million, while your friend would have $2.85 million!

Those annual fees, less than 1% higher for you, would have eaten $264k more from your account than your friend’s. However, what’s worse is that you’d also lose a good chunk of account growth as a result, for a total loss of over $679k!

That’s because fees reduce your balance each year, leaving less money invested. Over decades, that smaller balance compounds into dramatically lower retirement wealth.

Another way to look at the impact is that you’d need to work to age 67 to end up with the same 401(k) balance that your friend would have around age 63, allowing him to retire nearly four years earlier!

If your friend decided to retire at age 57, with a $1.37 million 401(k) balance, you’d need to keep working to age 60 to reach that same balance.

As Table 1 shows, compared to a hypothetical 401(k) plan with zero fees, your friend loses a total of $224k, or 7% of potential accumulation; while you lose $903k, over 29% of your accumulation. As a result, at age 67, your friend can draw 114% of his last pay, enough for some high-end travel, while you’d need to make do with 87% of yours.

All this becomes far worse if your small employer’s 401(k) plan doesn’t offer solid, low-cost funds like those offered by your friend’s plan. If a similarly performing fund in your plan charges 0.5% more than your friend’s fund, your ending balance would shrink by a further $273k, for a total loss of over 38%!

And all this, because you work for a much smaller employer than your friend!

How Does All This Affect Your Chance of Successful Retirement?

The Center for American Progress carried out simulations to see how 401(k) fee levels affect the probability of achieving sufficient retirement income. Perhaps unsurprisingly, they found that success probability and fee levels are significantly negatively correlated, i.e., the higher the fees, the lower the likelihood of success. 

As shown in Table 2, the typical worker can achieve a high enough retirement income 69% of the time if their plan fees are 0.5%, but this drops precipitously to just 29% if fees are 2%.

Is All This Common Knowledge?

You would think that anything that could so massively impact your eventual nest egg size would be common knowledge.

If so, you’d be wrong!

According to the Government Accountability Office (GAO), “GAO found that 45 percent of participants are not able to use the information given in disclosures to determine the cost of their investment fee. Additionally, 41 percent of participants incorrectly believe that they do not pay any 401(k) plan fees.”

So, not only do fees make a huge difference, but more than 4 in 10 participants thought they paid no fees, and even of those who knew there were fees, 45% couldn’t figure out how to translate the fee information plans disclosed to them into practical financial results.

What You Can (and Probably Should) Do

Nobody is suggesting that you quit your job if you work for a smaller employer, just because their 401(k) plan fees are higher.

However, there are steps you should consider:

• Ask HR or your 401(k) plan administrator how much your plan charges in fees, and how much additional fees are charged by each specific fund in the plan. As they say, knowledge is power.
• Next, review your portfolio to see if the funds you picked that charge higher fees achieve better after-fee results. Research shows that, on average, the opposite is true.
• For those funds that charge you higher fees and achieve lower returns, move your money into funds with higher after-fee returns.
• If your plan is so small that it has to charge high management fees, consider contributing each year only enough to max out your employer match, if any. Whatever further amounts you can save should be invested in an IRA with good fund options and much lower fees.
• If your plan has such high fees and you leave that job, roll your 401(k) balance into a lower-cost IRA, as above.

A Counter-Intuitive Exception

Interestingly, despite the negative correlation between plan size and annual fees, the smallest plans in the country aren’t the most expensive.

Individual 401(k) plans for self-employed workers, with just one participant and likely under a $1 million balance, can be among the cheapest.

That’s been my personal experience.

As I alluded to above, I invested heavily in my 401(k) plan for over 15 years. And that plan had exactly one participant – me. As a result, the plan balance has always been very small compared to plans run for employers with multiple employees.

However, my individual 401(k) plan doesn’t charge any management fees, beyond those charged by the mutual funds and/or Exchange Traded Funds (ETFs) in which I invest my plan balance. 

There is a $20 service fee per account, but that fee is waived for an individual with a combined balance of at least $50k, which I surpassed many years ago.

This is possible because with just one participant – me, and with me also acting as the plan administrator (minimal effort required), there’s nearly no administrative overhead, and I can pick very low-cost ETFs and relatively low-cost mutual funds.

My per-fund fees vary from 0.03% for index ETFs like Vanguard’s S&P 500 ETF (VOO) to 0.61% for T. Rowe Price Capital Appreciation Fund – I Class (TRAIX). As a result, I end up paying an average fee of just 0.10%!

If you own a solo business, an individual 401(k) can make it much easier to build a nest egg than most employers’ 401(k) plans, even ones that charge relatively low fees.

The Pros Weigh In

I asked professional financial advisors three questions. Here’s what they had to say.

How much do fees really impact retirement outcomes over decades?

Jakhongir “King” Mirtalipov, Founder and Principal Advisor, Dream Life Wealth Management, says, “Considering fees is essential when it comes to employer retirement accounts like 401(k). Administrative fees associated with offering 401(k) plans have come down significantly over the last few years due to high competition, but those fees still could be thousands of dollars per year. For companies with fewer than 100 employees, those fees could be a significant expense annually. One of the ways companies ‘share’ those fees with employees is by ‘offering’ high-cost (high expense ratio) investments (active mutual funds and ETFs) in their 401(k) plans.”

Lucas Fender, CRPS®, Chartered Retirement Plans Specialist at Proper Planning & Wealth Management, agrees, “Fees in the absence of value can be extremely costly when compounded over many years. Some plans offer in-person meetings with experienced, credentialed advisors. Other plans have an unlicensed person come by the office once or twice a year to click through a premade slideshow.”

Dr. Steven Crane, Founder of Financial Legacy Builders, also agrees and expands, “Many people underestimate how much fees matter over time because they look small on paper. If someone sees a 1% fee versus a 0.10% fee, it doesn’t sound like a big deal. But when you stretch that difference over 20 or 30 years of compounding, it can quietly eat away a huge portion of someone’s retirement savings. For middle-class workers, especially, every dollar matters. Losing a big chunk of growth to unnecessary fees can mean the difference between retiring comfortably and constantly worrying about running out of money.”

What should workers look for when evaluating investment options inside their 401(k)?

Mirtalipov again, “If a retirement plan offers ETFs or index funds, I always recommend considering those investments first, as they typically have very low internal costs (expense ratios). Another option, in the absence of low-cost ETFs or index funds, would be to choose a retirement target-date fund.”

Fender says, “Workers should look for a variety of investment options available within their retirement plan, including low-cost passive funds, a stable value option, and perhaps actively managed funds or a self-directed brokerage account (SDBA). Workers should also look for low-cost, highly rated target date funds (TDFs) within their retirement plans.”

Crane advises, “The first thing I usually tell workers is to keep it simple. Look at the expense ratios of the funds. In many plans, low-cost index fund options sit right next to much more expensive actively managed funds. The expensive ones are often marketed as being more sophisticated, but that doesn’t mean they perform better. In many cases, the simpler, lower-cost options end up doing just fine over long periods. Another thing people should pay attention to is how diversified their options are and whether the funds actually match their time horizon. A 30-year-old should not invest the same way as someone who’s 60. But unfortunately, many workers either pick a few funds at random or leave their money in whatever the default option was when they enrolled.”

What can workers do to minimize the impact of fees on their 401(k) balances?

Mirtalipov suggests, “Investment growth takes time and patience. Minimizing frequent changes in the account can help with lowering expenses, as many 401(k) plans charge extra if you make frequent changes in your account. Maximizing contributions and at least receiving the full match from the employer helps offset the cost. You can also roll your 401(k) to your IRA at the age of 59.5 if you’re still employed (the process is called an in-service rollover). Rolling over to your IRA is not a taxable event, and so there are no taxes to be paid (if done correctly). By rolling into a self-directed IRA, you can decrease or eliminate fees associated with employer retirement plans. For example, Schwab doesn’t charge any commissions when you buy the majority of ETFs or individual stocks through their platform.”

Fender offers this advice, “Workers may minimize the impact of fees in their 401(k) balances by choosing lower-cost investments within the plan. Another option is to utilize a self-directed brokerage account to access even lower-cost investments. In some cases, they may want to speak with their benefits department about choosing different investment options or even 401(k) providers.” This last assumes the employer is open to such changes.

Crane’s mostly agrees and adds, “If someone wants to minimize the impact of fees, the biggest lever they have is to choose lower-cost investments when available. Index funds and target-date funds with reasonable expense ratios are often good starting points. If the plan options are limited or unusually expensive, another strategy is to contribute enough to capture the employer match, then invest additional savings in an IRA, where you usually have far more choices and lower-cost options. At the end of the day, a 401(k) is still one of the best tools workers have for building retirement savings, especially if there’s an employer match involved. But it’s worth taking a little time to understand what’s happening under the hood, because small fees that seem harmless today can quietly add up to a very large number over a working lifetime.”

One advisor offered a completely different viewpoint.

Ben Simerly, CFP®, Financial Advisor and Founder, Lakehouse Family Wealth, says this, “Not all employer retirement plans are built alike. In fact, at a high level, last I checked, there were about 27 different types of employer retirement plans, and thousands of permutations. So, the first thing I coach any client on as they job hunt is how to ask for retirement plan and benefits documents from a prospective employer. 

“The first thing we all look at is costs, right? And it’s a reasonable starting point for a 401(k). 1% really adds up. But the real cost/benefit is in what you get for it. So, I advise clients to look at plans with me with three ideas in mind:

• “The available investments. Always zoom back out from fees and take a look at the broader plan. The reality is that most plans pick investments based on the likelihood of a lawsuit, not performance or quality. The two are different goals. For example, between some common 401(k) funds with comparable risk and class, there is as much as a 6-8% difference in average annual growth rate over 10 years. I’ll happily pay 1% more for that much more growth.
• “The features in the plan. Better contribution matching, better investments, better Roth and In-Plan rollover options, in-service distributions, and Mega-Back-Door-Roth-IRA options are all potentially worth more than a decrease in cost. The keyword being ‘potentially.’
• “Talk to decision makers. More often than not, these folks have too much on their plate. If you’re willing to do the digging, they may let you help them make a change. I’ve worked with owners of many small and mid-size companies who were happy to make a change if someone was willing to do the legwork for them. Always compare benefits and then maximize them accordingly.”

The Bottom Line

In investing, we often obsess over market returns. 

But for many workers, one of the most important determinants of retirement success may be far simpler: how much their 401(k) quietly charges them every year.

High-fee 401(k) plans can dramatically reduce your ending balance and, through that, delay your retirement date and/or reduce your retirement income. 

This can be one of many considerations regarding where you choose to work, but even if your other considerations have you pick a small employer, you can minimize the impact on your retirement plans’ total balance by educating yourself about fees and their impacts, checking what each fund in your plan(s) has returned net of fees over the long term, and choosing how much you invest in your 401(k) vs. your IRA.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

Traditional, Roth, HSA, or taxable account – which maximizes after-tax income and legacy?

Now that I’m mostly retired and have most of our nest egg in traditional tax-deferred accounts, I find myself wondering if I made a mistake.

With Required Minimum Distributions (RMDs) looming, will those decades of tax deferral come back to haunt me?

We did maximize our Health Savings Account (HSA), but should I have put less into tax-deferred accounts and more into Roth or taxable instead?

Let’s compare four account types so you can decide which one really wins for you.

What Does Winning Mean Here?

For pre-retirees, here are the criteria I find most important:

1. Flexibility before retirement (e.g., convertibility)
2. After-tax retirement income
3. Maximum amount allowed to be invested, including income limits (if any)
4. Limitations on penalty-free and/or tax-free withdrawals
5. Tax treatment for spousal and non-spousal heirs

As we’ll see below, every account is a trade between tax timing, flexibility, and legacy efficiency. Thus, different account types “win” in different circumstances and by different criteria. 

Meeting Our Contenders and Their Tax Characteristics

Here’s a quick reference guide for the tax characteristics of the different account types.

Next, let’s dig a little deeper into each account type.

Traditional IRAs and 401(k) Plans

Both of these are tax-deferred retirement accounts. The IRA is an individual plan available to anyone with earned income, while the 401(k), along with its cousins, the 403(b) and 457 plans, are employer plans to the benefit of employees.

Since the 403(b) and 457 are limited to employees of state and local governments, religious organizations, public schools, and non-profit organizations, we’ll ignore them here.

Annual Contribution Caps (for 2026)

• IRAs: $7,500, plus $1,100 catch-up for people over age 50.
• 401(k) plans: $24,500 elective salary deferral, plus $8,000 catch-up for employees over age 50. Employers are allowed, but not required to, match employee contributions. However, the overall contribution may not exceed the lower of 100% of the employee’s compensation or $72,000 ($80,000 if over age 50 and $83,250 if aged 60-63).
• Note that these limits are shared with the Roth versions of the same account types.

Income Limit to Contribute

None.

Deductibility Limits (for 2026)

• For IRAs, there is a complex set of deductibility limits, depending on your filing status and whether or not you and/or your spouse have access to an employer retirement plan. For example, if married and filing jointly, and you have access to an employer plan, you can fully deduct up to a Modified Adjusted Gross Income (MAGI) of $129,000. For MAGI above $149,000, none of your contributions are tax-deductible. For MAGI between the two numbers, you can deduct a prorated fraction of the contribution. If neither you nor your spouse (if married) can access an employer plan, the deductibility of your contributions isn’t subject to income limits.
• There are no deductibility limits for employee contributions to 401(k) plans (up to the contribution limit). Employer contributions are deductible to the employer, up to 25% of employee compensation.

Withdrawal Rules

• Taxed as ordinary income in the year of the withdrawal.
• With limited exceptions, withdrawals before age 59½ are subject to a 10% penalty in addition to taxes.
• RMDs apply (if not already subject to RMDs, RMDs begin at age 73 for those who turn 73 before 2033; those who turn 73 in 2033 or later will be subject to RMDs from age 75).

Heir Rules

Inheritance rules are different for spouses and non-spouse heirs.

• Spouses:
  • If the original account holder had already started RMDs, their widow(er) can (a) keep the account as an inherited account and delay their distributions until the original account holder would have turned 72; (b) take distributions based on their own life expectancy; or (c) follow the 10-year rule, wherein they must drain the account within 10 years of the original account holder’s death. Alternatively, the widow(er) can roll the account over into their own IRA.
  • If RMDs had not been started, the widow(er) can keep the account as an inherited account and take distributions based on their own life expectancy, or roll it over into their own IRA.
• Non-spousal heirs:
  • If an “eligible designated beneficiary” (for non-spouse, this is a minor child of the original account holder, disabled or chronically ill, or someone who is no more than 10 years younger than the original account holder), can (a) take distributions over the longer of their own life expectancy or the original account holder’s remaining life expectancy, or (b) follow the 10-year rule. 
  • If not an eligible designated beneficiary, must follow the 10-year rule.

Pro for Pre-Retirees

Get tax deductions during peak earning years.

Cons for Pre-Retirees

• RMDs apply.
• Withdrawals get stacked as taxable income on top of wage income and realized short-term capital gains, all subject to the high rates of taxes on regular wages. This may push you high enough to be subject to Medicare Income-Related Monthly Adjustment Amount (IRMAA).
• Non-spousal heirs must drain the account within 10 years and pay regular wage tax rates on the resulting withdrawals.

Roth IRAs and 401(k) Plans

These are similar to the traditional accounts mentioned above, but instead of getting a tax deduction now and paying taxes later, you contribute after-tax dollars, and withdrawals are tax-free (once the account has been open for five years). 

Annual Contribution Caps (for 2026)

• IRAs: Share limit with traditional IRAs.
• 401(k) plans: Share limits with traditional 401(k) plans.

Income Limit to Contribute

• Complex income limits for Roth IRAs – for example, if married and filing jointly, MAGI up to $236,000 allows Roth contributions. MAGI above $246,000 disallows it. MAGI between those allows a prorated reduction in contribution limits.
• Can convert from traditional to Roth. Note that the IRS uses a pro-rata rule for the total balance of after-tax vs. pre-tax balances across all IRAs when calculating what part of the conversion is not taxable.
• Can make “back-door” contributions by making an after-tax contribution to a traditional IRA, then converting to a Roth. The pro-rata rule applies here too.
• None for 401(k).

Deductibility Limits

Not deductible.

Withdrawal Rules

• Tax-free withdrawals.
• Withdrawal of contributions is allowed, but you cannot later reverse it.
• With limited exceptions, withdrawals of earnings before age 59½ and/or before the account is five years old are subject to a 10% penalty.
• RMDs don’t apply.

Heir Rules

Generally, the same rules as for non-Roth accounts, except that withdrawals are tax-free, However, withdrawals of earnings from accounts that are less than five years old may be subject to income tax. Since the 10-year rule doesn’t require withdrawals in any specific year, the heir can hold off on withdrawals until the Roth account is five years old, and thus avoid such taxation.

Note that heirs’ RMDs from an inherited Roth account are separate from RMDs from Roth accounts not inherited from the same person.

For qualified employer plans, such as a 401(k), there are further rules.

Pros for Pre-Retirees

• Tax-free retirement income.
• Heirs receive tax-free.
• If tax rates are lower now than later, can pay lower tax now to avoid higher tax later.
• No RMD

Cons for Pre-Retirees

• No current tax deduction, potentially at a high tax bracket.
• Higher taxes now may mean current cash flow doesn’t allow maxing the contribution limits.
• Conversions cause a taxable income spike, possibly causing IRMAA.

HSAs

These are intended to provide a way to cover qualified healthcare expenses with pre-tax dollars. These accounts enjoy a triple tax benefit:

• Tax deduction for contributions.
• Tax-free growth.
• Tax-free withdrawals (for qualified health-related expenses).

As a result, these can be used as a long-term way to maximize healthcare dollars for retirement.

Annual Contribution Caps (for 2026)

Assuming you have an HSA-compliant high-deductible health plan (HDHP), you can contribute up to $4,400 for an individual or $8,750 for a couple or family.

Income Limit to Contribute

None.

Deductibility Limits

Fully deductible (assuming HSA-compliant health plan).

Withdrawal Rules

• Tax-free withdrawals for qualified health-related expenses.
• After age 65, can use like a traditional IRA for non-health expenses.
• RMDs don’t apply.

Heir Rules

• Spouses: inherit as HSA.
• Non-spousal heirs: taxed for full market value in the year of inheritance. This means, for example, an inherited $200,000 HSA could add $200,000 of taxable income to your child in a single year, potentially pushing them up into an extremely high tax bracket.

Pros for Pre-Retirees

• Current tax deduction.
• Tax-free way to fund healthcare expenses in retirement.
• No RMD

Cons for Pre-Retirees

• Must be enrolled in HDHP.
• Penalties apply for withdrawals not used to cover eligible health-related expenses before age 65.
• Worst tax setup for non-spousal heirs.

Taxable Portfolio

This is the least tax-efficient for you, but more tax-efficient for your heirs than a traditional retirement account, and especially compared to an HSA.

Annual Contribution Caps

None.

Income Limit to Contribute

None.

Deductibility Limits

Not deductible.

Withdrawal Rules

None.

Heir Rules

Heirs enjoy a step-up in basis, which means no taxes are ever due on gains that were unrealized as of the death of the original account owner.

Pros for Pre-Retirees

• When used for retirement income, (long-term) realized capital gains are taxed at the preferred long-term capital gains rates (0%, 15%, or 20%, depending on your taxable income).
• Greatest flexibility.
• Heirs receive with step-up basis.
• No RMD

Cons for Pre-Retirees

• No current tax deduction, potentially at a high tax bracket.
• Dividends and interest are taxed in the current year.
• Mutual funds distribute capital gains annually, increasing current-year taxes.

Head-to-Head Comparisons

Here’s a quick summary of the four account types with their pros and cons.

My Personal Math

Numbers clarify trade-offs better than theory. Here’s how the math worked in our case.

Whenever I had an HDHP, I maxed out our HSA contributions.

Beyond that, I maxed out our traditional, tax-deferred contributions to the best of our ability, given our cash flow each year.

Let’s see how that math works when your contribution is limited by cash flow. Say you can set aside $3,350 a year and pay a total marginal tax rate of 30%. That translates to contributing $5000 into your HSA or traditional retirement account and getting a tax deduction worth $1,500, or putting $3,500 into a Roth or into your taxable account.

• Putting $5,000 in an HSA: Fits within your after-tax cash flow, grows tax-free, and allows tax-free withdrawals for qualified health expenses. Assuming 7% real (inflation-adjusted) return, you’ll have about $10,000 in 10 years, all of which is accessible for use.
• Putting $5,000 into a traditional retirement account: Fits within your after-tax cash flow, grows tax-deferred, and allows penalty-free withdrawals after age 59½ (some exceptions allow earlier penalty-free withdrawals). Assuming 7% real (inflation-adjusted) return, you’ll have about $10,000 in 10 years, but if you’re still paying 30% marginal tax rate, only $7,000 is accessible for use.
• Putting $3,500 into a Roth account: Fits within your after-tax cash flow, grows tax-free, and allows tax-free withdrawals once the account is at least five years old and you’re 59½ (contributions can be withdrawn earlier). Assuming 7% real (inflation-adjusted) return, you’ll also have about $7,000 in 10 years, all of which is accessible for use.
• Putting $3,500 into a taxable account: Fits within your after-tax cash flow, dividends and interest are taxed annually, and capital gains are taxed when realized. Realized long-term capital gains are taxed at preferred rates (0%, 15%, or 20%, depending on your taxable income). Assuming 7% real (inflation-adjusted) return, you’ll have less than $7,000 in 10 years (if you had to pay annual income taxes from dividends and interest income), and the accessible amount is even lower due to taxes on realized capital gains.

Had we not been limited by cash flow, maxing out Roth contributions would have provided more retirement income than traditional retirement accounts. Had we made the contributions to a traditional account and used the tax benefit to fund a taxable investment, the difference would shrink, but not disappear.

From the perspective of eventual heirs, we need to drain our HSA before touching our Roth accounts, and preferably before draining our tax-deferred accounts. Once the HSA is drained, we should drain as much as possible of our tax-deferred accounts before draining our taxable portfolio.

However, I don’t plan to let the bequest tail wag the retirement-income/tax dog. Accordingly, we will use our HSA in years when our taxable income is higher, and when we have little taxable income, we’ll “fill” the 12% federal tax bracket by converting a portion of our tax-deferred balance into a Roth account.

More General Math

Pre-retirees need to balance their priorities and risks. These include:

• Current marginal tax rate (federal, state, and local).
• Expected marginal tax rate in retirement, especially once RMDs hit.
• IRMAA risk, especially once RMDs start growing.
• Estate goals.
• Current liquidity needs.

Your winning option depends on your priorities and which risks most concern you. 

If your top priority is maximizing after-tax retirement income, your winning strategy is maximizing HSA contributions, if you’re eligible, up to the point where your balance is more than you’re likely to spend on qualified healthcare expenses during your lifetime.

Next, if your tax rate in retirement is likely to be equal to or higher than your current rate, Roth accounts win. If not, traditional retirement accounts are better.

If your top priority is managing RMD risk and/or funding healthcare costs, HSAs are once again your top winner, followed by Roth accounts and a taxable portfolio.

For the greatest flexibility, a taxable portfolio is your best bet.

If your priority is ensuring your heirs get the biggest benefit, Roth accounts are the clear winners, followed by traditional retirement accounts.

In short, If all else is equal and used optimally:

1. HSA wins for healthcare dollars.
2. Roth wins for legacy (e.g., $1 million inherited by non-spouse taxed at a total 33% rate in a traditional IRA is worth $670k vs. $1 million in a Roth is worth $1 million) and RMD control.
3. Traditional wins if current tax rate > retirement tax rate.
4. Taxable wins for flexibility.

Interesting Takes from the Pros

I asked several financial advisors for how they advise their clients, and the biggest mistakes they see people making when saving for retirement. Here’s what they had to say.

Alex Bridges, CFP®, ChFC®, RICP®, Wealth Advisor, Tiverton Wealth, says, “Because every financial plan is as unique as a fingerprint, account selection is never a generic exercise; it requires balancing current tax liabilities with future flexibility. I frame this decision for clients through the lens of Tax Diversification. 

“For young professionals just starting, we aggressively favor the Roth side of the equation, Roth IRAs, Roth 401(k)s, and Roth 403(b)s. In lower early-career tax brackets, the upfront tax deduction of a traditional account is less valuable, whereas decades of tax-free compounding growth are incredibly powerful. However, as clients enter their peak earning years, the strategy shifts. We start balancing the need for immediate tax relief via pre-tax deferrals with the necessity of future tax flexibility. 

“For our small-business-owner clients, this often involves layering bespoke retirement plans, like pairing a Safe Harbor 401(k) with a Cash Balance Plan, to maximize their personal tax deductions while simultaneously structuring beneficial retention incentives for their employees. Ultimately, my goal is to ensure a client never reaches retirement with all their eggs in one tax basket. 

“We aim to build a ‘three bucket’ strategy: tax-deferred via traditional 401(k)/IRA, tax-free via Roth accounts, and after-tax in taxable brokerage accounts. A perfect real-world example of this synergy is an employee who contributes their own money to a Roth 401(k), receives their employer’s matching funds in a pre-tax bucket, and systematically funds a taxable brokerage account on the side. This triangulation gives us ultimate control over their tax destiny in retirement. 

“The single most pervasive mistake I see is tax concentration, which is arriving at retirement with entirely one type of tax asset. I often work with highly successful professionals, such as retired attorneys, who accumulated massive wealth. Often, they own their homes outright and have multi-million-dollar balances sitting entirely in pre-tax IRAs. 

“On paper, they are wealthy, but functionally, they are trapped, because every single dollar they withdraw is taxed as ordinary income, so they have zero control over their retirement tax bracket. This lack of tax diversification can trigger a ‘tax torpedo,’ exposing them to massive RMDs, higher taxes on their Social Security benefits, and steep Medicare IRMAA surcharges. 

“Conversely, while many advisors preach that ‘all Roth is perfect,’ overconcentration in Roth accounts presents its own set of challenges, particularly for early retirees. If you want to retire at 50, having 100% of your assets tied up in pre-tax or Roth accounts usually means navigating restrictive IRS rules and potential 10% penalties to access earnings before age 59½. 

“This leads to what I consider the most underrated retirement vehicle: the after-tax taxable brokerage account. There is a lot of noise in the industry dismissing taxable accounts for retirement savings, but I view them as the ultimate ‘bridge account.’ 

“If you have a healthy after-tax portfolio, you can retire at whatever age you choose. There are no age restrictions, no early withdrawal penalties, and the funds are subject to highly favorable long-term capital gains tax rates rather than ordinary income rates. Failing to build this after-tax bridge is the biggest missed opportunity for anyone dreaming of financial independence before age 60.”

Anthony Ferraiolo, CFP®, Partner Advisor at AdvicePeriod, agrees and expands, “As pointed out above, the best account type is really a combination of many. It’s not uncommon for clients to tell me they wish they had more money in their Roth IRAs or HSAs, but Roth IRAs debuted in 1998 and HSAs in 2003. I tell them that if all their money was in Roth accounts, they probably would have missed some tax-arbitrage opportunities during their working years. 

“However, I think HSAs provide some good mental accounting benefits in addition to their tax benefits. It’s a lot easier to stomach a $5K dental bill in retirement when you have a tax-free bucket to tap. 

“During all these conversations, I often feel that the plain old regular taxable account gets the least love but is one of the most flexible tools for your accumulation and retirement years. There are really only two cons to the taxable account: no tax benefit, and taxes on interest and dividends along the way. 

“However, the latter is an overblown concern, and there is a minor tax benefit that may come into place. I say the latter is overblown because with a proper account structure, with the inclusion of municipal bonds or municipal bond funds, most of your bond allocation’s income can be tax-exempt, so there’s little to no carrying cost for bonds. This is important because in most people’s retirement, if they retire before they can claim Social Security benefits, they may tap their taxable portfolio’s bonds for more stable distributions. 

“Next, you have tax-efficient ETFs. Nowadays, you can even find low-to-no-dividend ETFs for your favorite indices or prioritize growth stocks or US stocks, which could have lower yields than their international counterparts. These accounts have the most flexibility, no contribution limits, age limits, penalties, etc., so when ‘life happens’ you don’t need to worry about the tax hit too. 

“The hidden tax benefit is twofold when you invest cash during a high-yield environment vs. keeping it in a high-yield savings account, you can reduce the tax hit from your assets. 

“Similarly, if you need $50k from your portfolio, you may only need to pay capital gains on a fraction of that amount, and in some cases, that can be at the 0% tax bracket. It always depends, but I don’t think the regular taxable account gets enough credit for its Swiss-Army-Knife-like character. 

“The biggest challenge with the taxable account is that it doesn’t, by default, have automations connected to your paycheck, like your 401(k) or HSA, which means it takes intention to build up this account. So, while the tax benefits are attractive compared to the other accounts, the regular taxable account remains a bit underrated in my view.”

Ben Simerly, CFP®, Founder and Financial Advisor of Lakehouse Family Wealth, rounds out the conversation, “First, adding to the 401(k) discussion above, there are technically annual compensation limits to 401k accounts, including pre-tax dollars. This does not factually change the outcome because of the contribution limits themselves, but I have seen it impact those with unique plan contribution percentage rules and higher incomes. 

“Also, since these conversations often affect families looking into trusts, you should note that the above-mentioned rules can be significantly affected by the use of trusts, both for the owner of the assets, and those inheriting them. 

“Account type questions are some of the most common ones we receive. There are two sets of answers. The first is technical: what fits the client according to the math? The second set of answers addresses the emotional aspect. What helps the client feel most comfortable? 

“More often than not, it’s the client’s comfort level with a given path that helps find the answer that’s best for them. From a math perspective, the biggest mistake we see is looking at the account-type choice based on current tax return savings. Choosing a pre-tax 401(k), for example, may reduce current taxable income. But what’s the effect of choosing a pre-tax 401(k) vs. a Roth or after-tax 401k sub-account on lifetime taxation and lifetime income from investments? 

“Often, a significant decrease in current taxes can create a significant decrease in retirement income. The other major factor on the math side is legacy. If an account type being considered will be primarily used for legacy to children or non-profit donations, it can completely change the math of the situation. 

“From the emotional perspective, the number one question is this: would you rather pay taxes later when you are unsure of your ability to work or make up the difference? Or would you rather pay the taxes now while you’re able to work, likely have more control over your life and ability to work, and a choice over your investments? 

“Once someone nears retirement, choices decrease. Once someone retires, they decrease further. Whether it’s from IRMAA bracket considerations, RMDs, or a potential future disability, we may not always have the same choices in the future that we have now. 

“More often than not, our clients choose to focus on Roth, or after-tax, contributions to pay more of the taxes now while they have more control. We love the benefits of Roth accounts and the after-tax growth. Especially with the length of modern retirements. But taxation relative to ability to work decides more cases than any other single factor we’ve encountered.”

The Bottom Line

So, did I make a mistake that will come back to haunt me?

Tentatively, my answer is that I didn’t.

True, having such a concentrated bet on tax-deferred accounts does reduce our flexibility in any specific year. For example, anytime we have an especially high spend in retirement, we’ll need to account for the higher taxes we’ll be hit with.

However, while I didn’t dig in deeply enough ahead of time to make the most informed choices, overall, I don’t regret what we did because it ended up allowing us to make the most of what our cash flow allowed us to set aside.

More generally, what I learned is that there is no perfect account type. There is only a tax structure that fits your stage of life, and managing your tax brackets over time. And the earlier you understand the trade-offs, the fewer regrets you’ll suffer. 

However, always keep in mind that the US tax code changes often, sometimes dramatically, and all the above assumes things will mostly stay as they currently are. But that’s the best we can do without a functioning crystal ball.

In the end, the real winner isn’t one account type, but rather tax diversification across the account types that fit your priorities. 

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

It used to be employers’ problem. 

Now it’s ours…

Until the start of the 401(k) plan, in the 1980s, most American workers relied on three things for retirement:

• Social Security, funded jointly by employees and employers, each paying in an amount that started at 1% of employee wages in the 1930s, and is now 6.2% each.
• Defined benefit pensions, funded by employers, with payouts based on employees’ length of employment with the specific employer, and their final salary.
• Private savings, funded by employees to the extent that they choose to save and invest some of the money they earn, rather than spend it all.

But employers didn’t love the pension system. 

A CNBC article quotes Monique Morrissey, an economist at the Economic Policy Institute, “The risk is all on the employer or the pension fund. The pension fund or the employer has to figure out how many years on average the people in the pension fund are going to live and has to tie the benefits to projected earnings.”

The employer’s pension fund is on the hook for those benefits, whether or not they manage to bring in market returns high enough to bridge the gap between employer contributions and employee benefits.

The 401(k), however, changed all that.

Now, our retirement “stool” has only two legs:

• Social Security.
• Private savings, including 401(k) plans.

We didn’t just change retirement plans; we changed who carries the risk.

As a “defined contribution” plan, a 401(k) plan puts the employer on the hook only for the current contributions they choose to make. Not for investing well or ensuring the resulting balance provides enough retirement income for the retiree’s lifespan.

In short, employers shifting from defined benefit to defined contribution plans moved longevity risk, market risk, and behavioral risk from corporations to individuals, and most people didn’t notice until it was too late.

Worse, most individuals were never trained to manage those risks.

Understandably, most people are unhappy about it.

According to the National Institute on Retirement Security (NIRS), “A national opinion poll finds that working age Americans are increasingly worried about retirement, and they see a return to pensions as a way to restore the American Dream of retirement. Eighty-three percent of respondents say that all workers should have a pension so they can be independent and self-reliant in retirement, and more than three-fourths of Americans agree that those with pensions are more likely to have a secure retirement.”

How Well Are We Doing in Funding Our Retirement?

According to the Investment Company Institute, at the end of the third quarter of 2025, US retirement assets topped $48 trillion, including:

• $18.9 trillion in Individual Retirement Accounts (IRAs) – private savings
• $13.9 trillion in defined contribution plans like 401(k), as well as the less common 403(b) and 457 plans – private savings again
• $12.6 trillion in defined benefit plans (private and government) – pensions 
• $2.6 trillion in annuity reserves – a form of private savings

Those look like big numbers, but let’s break them down by household to see what people actually get to retire on.

According to Federal Reserve data, the average American household where the “reference person” is aged 65-74 has about $609k in retirement funds. For those aged 75 or older, that number is significantly lower, at $462k.

But that’s the average, which is skewed by the very wealthy.

A more informative measure is the median, the value at which half the group is above, and half below. 

There, the numbers are significantly lower, at $200k for those aged 65-74 and $130k for those 75 or older.

Americans have other financial assets (e.g., savings accounts, taxable portfolio, etc.) that can also be tapped in retirement, where the averages are $897k and $826k for the two age groups, respectively; and the median is again much lower, at $120k and $50k, respectively.

Summing the two types of accounts, the average for 65-74 year olds is just under $1.6 million, but the more illustrative median is only $320k (Table 1).

Table 1. Average retirement funds and total financial assets look substantial, but the median, which isn’t skewed by the small percentage of the uber-wealthy, is far from enough.

A $320,000 nest egg may sound substantial, but spread across a 25- or 30-year retirement, it offers a safe monthly draw of just $1000 to $1500.

That’s closer to a supplement than a solution, barely covering the average rent or mortgage payment, let alone groceries, utilities, and healthcare expenses.

That’s not retirement comfort.

That’s retirement fragility.

So maybe Social Security closes the gap?

Can Social Security Save Us?

That depends.

Mostly, it depends on your income, since Social Security is progressive by design. Its Primary Insurance Amount (PIA) replaces a larger fraction of lower incomes and a smaller fraction of higher incomes.

The PIA formula is a sum of three amounts relating to your Average Indexed Monthly Earnings (AIME, Table 2), which for 2026 are:

• For the first $1,286 of your AIME, your benefits replace 90%.
• For the portion between $1,286 and $7,749, your benefits replace 32%.
• For anything above $7,749, your benefits replace 15%.

All this ignores the looming exhaustion of the Social Security Trust Fund, now projected to happen in 2032. If no changes are enacted to address the issue before then, according to the Committee for a Responsible Federal Budget (CRFB), benefits would have to be cut by about 24%.

If implemented across all three PIA components, such a cut would change PIA to (in 2026 dollars, Table 2):

• For the first $1,286 of your AIME, 68.4%.
• For the portion between $1,286 and $7,749, 24.3%.
• For anything above $7,749, 11.4%.

Table 2. What Social Security retirement benefits replace now, and once the trust fund runs out (likely in 2032), if benefits are cut. Note that a 24% cut would address only the immediate shortfall. As the years go by, that shortfall is expected to worsen. 

The CRFB states, “We estimate that this would be equal to an $18,100 annual benefit cut for a dual-earning couple retiring at the start of 2033 – shortly after trust fund insolvency. At the same time, those retirees might experience reduced access to health care due to an 11 percent cut in Medicare Hospital Insurance payments. The cuts would grow over time as scheduled benefits continue to outpace dedicated revenues.”

How Confident Are Middle-Income Americans About Retirement?

With the above in mind, it’s little wonder that a CNO Financial Group survey found that, “Among middle-income Americans ages 50 to 85, one in three (32%) say they feel less confident in their retirement plans than they did a year ago, and two in five (41%) doubt they will have enough money to live comfortably throughout retirement—including nearly half (49%) of pre-retirees.”

They find that the top concerns are inflation, outliving savings, and cuts to Social Security benefits.

The NIRS survey agrees with CNO, “When asked if the nation faces a retirement crisis, 79 percent of Americans agree there indeed is a retirement crisis, up from 67 percent in 2020. More than half of Americans (55 percent) are concerned that they cannot achieve financial security in retirement. When it comes to inflation, 73 percent of respondents said recent inflation has them more concerned about retirement.”

There are some obvious reasons why these issues hit middle-income Americans especially hard.

In a Yale Tobin Center for Economic Policy report, the authors find that “in two-thirds of plans, employer contributions exacerbate pay inequity. Employer contributions are highly concentrated, with 44% of dollars accruing to the top 20% of earners.” 

This isn’t surprising, since the highest earners have a higher employer matching contribution cap (which is usually a percentage of income), plus, these high earners are typically better able to contribute a larger fraction of their income to their retirement plan.

Tax incentives are similarly skewed toward higher-income earners, since retirement savings tax deductions impact taxpayers’ marginal tax brackets, which, in our progressive tax system, are higher for high earners. 

For example, if you earn enough to reach the 24% tax bracket and live in a state where your state and local income tax is another 8%, and don’t itemize, every dollar you contribute to a tax-deferred retirement plan reduces your take-home pay by $0.68. If, on the other hand, your marginal federal tax rate is 12%, with the same state and local tax rate, every dollar you contribute to your retirement plan reduces your take-home pay by $0.80.

As a result of all the above, middle-income Americans feel increasingly stretched thin, being “too rich for help, but too poor for comfort and security.”

Financial Challenges Facing Middle-Income Americans

Retirement insecurity is no longer just a low-income problem. It is increasingly a middle-income margin problem. Multiple financial challenges impact middle-income Americans:

• Liquidity constraints driven by higher prices.
• Tax incentives skewed toward higher-income earners.
• Employer retirement plan matching contributions benefiting high-earning employees.
• Historically high real estate costs, along with mortgage rates that are more than double what they were a few years ago.
• Social Security benefits replace a small fraction of even middle-income earnings, especially if those benefits get cut as a result of the trust fund running out.
• Healthcare costs rising faster than overall inflation.

With all these, it’s especially difficult to not just save enough for a comfortable retirement, but even more so to build in a sufficient margin of safety or even know how much is “enough.”

Asking the Pros

I asked several financial advisors to weigh in on the topic. Here’s what they have to say.

Q. Many middle-income households appear “fine” on paper but have very little margin of safety. In your experience, how common is this, and what does it look like in real life?

A. Omar Morillo, Senior Wealth Advisor, Imperio Wealth Advisors, answers, “It’s extremely common to see middle-income households pass a static replacement-rate test on paper but collapse under stress testing. They may have a decent projected income in retirement, but with minimal emergency savings, high discretionary spending, and no buffer for market downturns or healthcare shocks. The slightest deviation from assumptions turns ‘fine’ into fragile.”

Alex Bridges, Wealth Advisor & Founder of Tiverton Wealth, agrees, “It’s very common. I regularly meet people with solid incomes, nice homes, and good careers who look financially stable from the outside. But when we review the numbers, there is little to no savings and no real investing happening. Often, they tell me they can’t free up anything each month. More often than not, it comes down to lifestyle creep. Income rises, spending rises with it, and the safety margin never gets built.”

Claire Thornton, Founder & Financial Planner at Hyla Financial, says, “It’s a confusing place for people to find themselves. Among six-figure earners (especially young families juggling childcare on top of everything else), I often hear the same refrain: ‘We feel broke.’ More often than not, that feeling is a signal that spending and values have drifted out of alignment. It’s time to go back to basics and measure goals against how money is being spent.”

Q. Since the shift from defined benefit pensions to 401(k)-style plans, individuals now bear longevity, market, and behavioral risk. Which of these risks do you see creating the most problems for middle-income retirees?

A. Morillo again, “All three risks matter, but behavioral risk is the silent killer for middle-income retirees. People underestimate how emotions distort savings behavior and withdrawal timing. You can have good longevity assumptions and decent market returns, but if someone stops contributing too early, chases returns, or panics in downturns, the outcome is materially worse.”

Bridges agrees again, “Behavioral risk, without question. Markets go up and down, and people are living longer. Those are realities. But what hurts most people is procrastination, under-saving, and emotional decision-making. I have many retired clients who only ever had 401(k) plans and are doing just fine. The difference is that they were disciplined. They consistently contributed, often maxed out their plans, and stayed invested.”

Thornton sees another risk as the most important, “The risk I see creating the most problems for middle-income retirees isn’t market volatility, it’s distribution management. A single additional dollar of income can trigger meaningful downstream consequences. Crossing an IRMAA [Medicare’s Income-Related Monthly Adjustment Amount] threshold can lead to higher Medicare premiums two years later, while poor income-tax coordination can shift Social Security from 50% taxable to 85% taxable or push capital gains from the 0% into the 15% bracket. For many middle-income retirees, the challenge isn’t how much they’ve saved, but how (and when) they draw from pre-tax, Roth, and taxable accounts. Thoughtful distribution sequencing can materially improve outcomes!”

Q. If Social Security benefits were reduced by roughly 20–25% in the next decade, how would that affect middle-income retirees differently from higher-income retirees?

A. Bridges says, “Middle-income retirees would feel it more. They tend to rely on Social Security for a larger portion of their retirement income. Higher earners usually have more diversified income sources and larger investment portfolios to cushion the impact. For many middle-income households, a reduction of that size would require real spending adjustments or a delay in retirement.”

Morillo totally agrees, “A substantial reduction in Social Security isn’t just a cut in income. It erodes the floor of retirement security. Middle-income retirees depend on Social Security for a larger share of their essential spending than high-income retirees, who have diversified income sources. Reducing benefits by 20–25% would push many from ‘just managing’ into outright shortfalls.”

Q. If a middle-income household wants to increase its retirement “safety margin” over the next 5–10 years, what is the single most impactful change you would recommend?

A. Bridges suggests, “Increase savings and be disciplined about investing. If you have 10 years, that’s a meaningful length of time. Max out retirement contributions, cut unnecessary spending, and stay consistent. And just as important, work with a fee-only advisor who specializes in retirement planning. Transparent advice with no product incentives can make a significant difference in the final stretch before retirement.”

Morillo expands, “The single most impactful change is prioritizing savings earlier and consistently, even at the expense of current lifestyle. Speeding up contributions when you’re earning income leverages compound growth and creates a vital safety margin that can absorb longevity risk, market volatility, and unexpected needs.”

The Bottom Line

The retirement trap is no longer just poverty.

It’s having little if any safety margin. Having too much to qualify for help, but not enough to feel safe.

The most important question then becomes, what can you do to increase your retirement safety margin?

The main things under our individual control include the following:

• Increase your retirement margin by resisting lifestyle inflation in housing. Just because the bank will lend you more doesn’t make it wise to borrow every dollar they offer.
• Only buy a car (or two) if you need it (or them). If you do buy, buying a new, reliable car and driving it for at least 10 years proves to be less expensive than buying used cars.
• Find ways to increase your income. This can be achieved by learning skills your employer values, taking on tasks that make your supervisor’s job easier, and/or monetizing existing or new skills through a side gig.
• Each time your income grows, dedicate at least half and up to two-thirds of the increase to retirement investments. Use the remaining half or third to enhance your enjoyment of life in the present. This makes it easier to stay the course.
• Try to keep your fixed costs as low as possible as a fraction of your overall budget, especially in retirement. The flexibility this gives you allows higher safe draws in retirement.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.