As it turns out, financially speaking, you might be planning for retirement in entirely the wrong way.

A financial analyst-turned-writer argued in a recent Quartz piece why all workers should be investing their 401(k) plans with the goal of growing their income for retirement. And believe it or not, income does not always equal wealth.

Traditionally, most elect the target-date investment fund, which is a mutual fund that will return your various assets (stocks, bonds, and cash) at a fixed retirement date -- depending on how well the market performs over time. Target-date funds are growing in popularity: As much as $700 billion was invested in target-date funds at the end of 2014, according to investment research firm Morningstar, up from roughly $600 billion the year prior. 

Sure, target-date plans are conservative from a wealth perspective because you typically start off with more stock and slowly unload it, which results in purchasing more short-term bonds as retirement looms. That means that your account is protected from dipping dramatically during a tough market (but you still keep one foot in the door, to reap the possible surges). Unfortunately, that might not be the best way to invest if you want to end up with the maximum amount of savings.  

One way to truly grow your income is to buy more annuities, in which the investor has to pay you annual sums, as well as bonds that will also pay out over time. The caveat with this method is that bonds and annuities typically come with long-term interest rates, and from a wealth perspective, that's more dangerous than short-term ones. If you're prioritizing income, however, long-term bonds are actually good: Their prices will vary depending on the annuities that you buy.

Certainly, it can be tempting to judge your 401(k) by its size, rather than its income potential. But, similar to those workers who are collectively leaving billions in unmatched retirement funds on the table, you'd also be missing the bigger picture: Gathering up the most funds to bank on when you're older. 

Published on: Jun 22, 2015