Maximizing Your 401(k), and Is Retirement Bad for Your Brain?

In this episode of Motley Fool Hidden Gems Investing, Motley Fool retirement expert Robert Brokamp discusses the following:

- The S&P 500 is near all-time highs, but small caps and international stocks are doing even better so far in 2026.

- A new study finds that retiring before 65 may accelerate cognitive decline.

- The U.S. government’s debt-to-GDP ratio is now over 100%, nearing the all-time high set after the end of World War II.

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A full transcript is below.

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Robert Brokamp: Making the most of your 401(k) and does retirement make your brain decay? That and more on this Saturday’s Personal Finance edition of The Motley Fool Hidden Gems Investing podcast. I'm Robert Brokamp. This week, I lay out 11 steps to making sure you’re maximizing the value of your work-based retirement plan, but first up, some headlines that caught my eye this past week.

The S&P 500 is up 6.4% so far this year, while the S&P 600 index of Small Caps is up 15.7%, and the FTSE Global All Cap ex-US Index of international stocks is up 10.6%. I came across a couple of articles this week, and both of these asset classes that I thought were worth highlighting. The first was published on wealthmanagement.com and comes from Larry Swedroe. He points out that the so-called small-cap premium, and that's the amount that small companies have historically outperformed large companies, seems to have disappeared in recent years, and many have questioned whether it actually ever existed. Larry cites a study from the Bridgeway Capital Management Group, which argues that the problem isn't the premium itself, but how we define small cap.

Their key insight, two groups are dragging down returns and obscuring a premium that is actually robust and persistent. The first group are labeled Fallen Angels, which are former large caps that recently crashed in value. If you take out the stocks that became Fallen Angels over the traveling for years, the returns of small caps improve by 1.57% annually since 1960. The other group is new market entrants, like IPOs, SPACs, Spin-Offs, which tend to underperform often by 2% to nearly 6% per year. Moving on to international stocks, a recent article from Morningstar’s Christine Benz pointed out that after years of underperformance, non-U.S. stocks surged in 2025, returning 32% for the year, compared to 18% for U.S. stocks. This marked a dramatic reversal from the prior stretch. When you go from 2009-2024, non-U.S. stocks returned about 7.6% compared to 14.5% for domestic equities. But beyond better recent returns, international stocks also began to decouple from the U.S. market, which enhances their value as diversifiers.

The Morningstar Developed Markets ex-US index had a 0.92 correlation with U.S. stocks over the three-year period ending in 2022, but that figure dropped to 0.71 by the end of 2025. For those who slept through statistics class, remember that a correlation of one means that two investments move in lockstep, so a lower number means less correlation and potentially more diversification. Merging markets have generally exhibited even lower correlations with U.S. equities, partly because their dominant sectors, such as energy and basic materials, differ from the tech-heavy U.S. market, and because countries like China follow a different economic cycle.

On a related note, I thought I'd mentioned a recent chart from Paul Kudronski, which highlighted that no other country invests in the stock market like Americans. Fifty-five percent of U.S. households have exposure to the stock market. The next three countries with the highest levels of stock ownership are Canada at 49%, Australia at 37%, and the U.K. at 33%. Americans invest in the stock market, mostly so we can retire. But retirement might not be so good for us. This brings us to our next item, which is a study from the University of California, Irvine entitled, "Does employment slow cognitive decline?" The answer is, yes, the study included approximately 40,000 older adults from 1996-2018 and found that, "correlational evidence suggests that leaving the workforce before retirement age could accelerate the pace of cognitive decline" and that, "employment near retirement age appears to reduce the risk of cognitive decline, which can in turn forestall the onset of dementia." The effects are particularly concentrated among men ages 51-64. This is just a recent example of many studies, which have found that retirement may not be so healthy for people physically, mentally, psychologically, or socially.

That said, there are plenty of happy, healthy retirees. I know many. The ones who seem to do the best, according to the MassMutual retirement happiness study, are more likely to fill their free time with multiple kinds of activities, including spending time with loved ones, exercising, pursuing hobbies, and traveling. Also, make sure you're doing things to keep your brain sharp.

Now let's move on to the number of the week, which is 100.2%. That's the U.S. government's debt-to-GDP ratio, according to data recently released by the Bureau of Economic Analysis, which noted that the debt held by the public on March 31 was $31.27 trillion, while GDP over the last year was $31.22 trillion. We Americans now spend more on the interest to service our debt than we do on defense or Medicare. According to a statement from the Committee for a Responsible Budget, “the national debt is now larger than the U.S. economy, about twice the historic average. We've heard plenty of alarm bells in the past few years about our fiscal path, but this one rings especially loudly. The real question is whether or not our leaders in Washington will listen. With debt now above 100% of GDP, it's only a matter of time until we pass the all-time record of 106% reached in the immediate aftermath of World War II. This time, the borrowing isn't born from a seismic global conflict, but rather a total bipartisan abdication of making hard choices." Next up, what choices you should make with your 401(k) when Motley Fool Hidden Gems Investing continues.

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Robert Brokamp: If you're like most working Americans, your No. 1 strategy for accumulating enough money to retire is by contributing to a defined contribution plan, such as a 401(k), 403(b), or the Federal Savings Plan. Consequently, when you retire will depend largely on how well you manage the account. Here are 11 tips for making the most of your employer-sponsored retirement plan, and just a note, I'm going to use the term 401(k) to apply to all types of defined contribution accounts.

Step Number 1, save enough and get the full match. The consensus among experts these days is that workers should aim for a savings rate of 15% of their household income and even higher if they're getting a late start on saving for retirement. Fortunately, the majority of workers don't have to come up with that 15% all on their own. More than 90% of employers match contributions, with the most common formula being a match of $0.50 for every dollar saved up to a savings rate of 6%. Those workers need to save 12%, and then the employer kicks in 3%. Unfortunately, most people aren't saving 15%. In fact, a third of employees don't even contribute enough to receive the full match, according to Vanguard. At the very least, make sure you're grabbing that free money your employer is offering.

Step No. 2: Choose the right type of account. Most 401(k)s allow for both traditional and Roth contributions. Your first decision is, when do you want your tax break? If you want it today at the cost of paying taxes on withdrawals and retirement, then go with the traditional account. But then do something smart with the money you save by having a lower tax bill this year. Use it to save even more money for retirement or some other goal like college. Just don't squander it. On the other hand, if you're willing to give up a tax break today in exchange for tax-free withdrawals in retirement, perhaps because you expect to be in a higher tax bracket in retirement, then go with the Roth. The other benefit of the Roth is that you aren't forced to take required minimum distributions at age 73 or age 75, if you were born in 1960 or later. This doesn't have to be an either-or decision. You can contribute to both the traditional and the Roth account as long as the combined amount doesn't exceed your annual contribution limit.

Additionally, some plans nowadays allow employees to decide the type of account that the employer match goes into. For the large majority of us, the match goes into a traditional account. That way, it's not taxable income to us, but the withdrawals will be taxed. If your plan allows you to have the match deposited into a Roth account, the match will be added to your taxable income for the year, but then the withdrawals will be tax-free. I'll also point out that there are some situations in which an employee actually has a choice of the account provider, and this is most common for teachers, where some school districts allow for more than one 403(b) or 457 provider. A good resource for teachers and other employees of nonprofits is 403(b)s.org, which rates the plans offered by many of the school districts in the U.S.

Step Number 3: Save more each year. Everyone loves getting a raise, but a 2020 report from Morningstar found that it actually can postpone a worker's retirement. Why? Because many people use a raise to increase the cost of their lifestyle, which in turn increases how much they need to have saved before they can retire because everyone wants to maintain their lifestyle in retirement. The report found that even workers who save a percentage of their income, say, 10% or so, contribute more to their 401(k)s after a raise, but it's often not enough. They also need to increase their savings rate. Morningstar suggested a few guidelines with the most effective being a rule that they dubbed, spend twice your years to retirement. For example, if you plan to retire in 15 years, spend 30% of your raise, but then contribute the remaining 70% to your 401(k).

Step Number 4, max out the account early or don't. As the old saying goes, it's not about timing the market but time in the market. After all, the S&P 500 has historically made money in about three out of every four years. In most scenarios, the sooner you invest your money, the more money you'll eventually have. Therefore, contributing the maximum to your 401(k) as soon as possible, rather than gradually over the course of the year, should result in a bigger nest egg in retirement.

However, before you pursue this strategy, it's very important to make sure this won't reduce the match you will receive from your employer. In most situations, the match is distributed on a per-paycheck basis. If you max out your 401(k) early, you may miss out on some of those matching contributions. The key here is to find out if your plan offers what is known as a true-up, in which any missed matches are deposited toward the end of the year. If your plan doesn't offer a true-up, then you should avoid maxing out the account before the final paycheck of the year. Since we're on the topic, the 401(k) contribution limits in 2026 are $24,500 for workers who are 49 and younger, $32,500 for ages 50-59 and 64 and older, and $35,750 for ages 60-63. The worker’s age on December 31 determines the applicable limit.

Step Number 5, create a mega backdoor Roth if your plan allows it. In addition to those aforementioned limits, there's another all in limit in 2026 of $72,000 plus the relevant catch-up limit for those who are 50 and older or 100% of compensation, whichever is less. This includes the employee and employer contributions. If your account hasn't reached that annual limit, you can make additional so-called after-tax contributions if your plan allows. Now, don’t confuse those after-tax contributions with Roth contributions, which are also technically after-tax, but the growth on these after-tax contributions is tax-deferred. That is, you don't pay taxes until you make the withdrawals, which are taxes ordinary income. Furthermore, when you leave your employer, you can segregate these after-tax contributions from the growth and transfer the former assets into a Roth IRA and the latter into a traditional IRA.

Technically, actually, what you're doing is you're converting those after-tax contributions to a Roth. However, because the converted amount doesn't involve any pretax money or growth, the conversion won't cost you anything. On top of all that, some plans allow for in-plan Roth conversions of these after-tax contributions, which then allow them to accumulate tax-free. This strategy is often called the mega backdoor Roth. This can get very