Should I Stop Contributing to My 401(k) When the Market Is Down?
Dylan Telerski / 5 May 2020 / Personal Finance
The news headlines may have you feeling financially defensive. It’s natural to feel nervous about 401(k) contributions, even though the current laws allow 401(k) contributors to borrow from their plans without penalty. But is your situation dire enough to warrant a reduction in savings for your future?
Signs You May Need to Pause Your 401(k) Contributions
Conventional wisdom dictates that you treat your retirement fund as a non-negotiable expense. Of course, these are unprecedented times of crisis. If you have no other alternatives and at least half these factors apply to you, a short-term pause may be enough to keep you afloat:
- Your income dropped, but your expenses didn’t go down. Sit down and look at your current spending and budget. Consider other ways of reducing expenses temporarily.
- You’re falling deeper into credit card debt. Credit card debt can snowball quickly with high interest rates. If you’re missing minimum payments, the penalties can add substantially onto what you owe. Some financial institutions offer debt relief programs and fee waivers to get you out of the crisis without impacting your 401(k).
- You’re very close to retirement. If you were planning to retire in the very near future, you may not want to add another year or two of work. Check to make sure you’re not overexposed to riskier equity investments. Instead of cutting your contributions, you may consider shifting over to less-risky investment choices like stocks and bonds.
- Your employer suspended matching contributions. Employer matching makes 401(k) savings particularly lucrative. If your employer has suspended matching contributions, it’s less expensive to halt your savings in favor of paying down debt with that money instead.
- You have no emergency fund and are at risk of losing your job outright. If you’re worried about losing your job, skipping a few paychecks’ worth of retirement savings can give you the cash reserves you need to temporarily pay for living expenses, should you suddenly lose your job.
Once you’re in recovery mode, consider doubling down on your contributions to catch up.
Reasons Not to Stop Contributing to Your 401(k) – And Maybe Ramping Up
Market volatility is troubling, but consider staying the course or even ramping up if:
- You have plenty of time to retirement. People in their 20s, 30s, 40s, and 50s have plenty of time to see a rebound and recoup any present losses.
- You are looking to maximize your portfolio. In fact, now might be the perfect time to load up on quality investments at rock bottom prices. Stocks are on sale. Shares are cheap. You may have had your eye on a few different investments, but the acquisition price was too high. Now many prices have come down on investments that can only go back up as the economy recovers.
- You like the idea of paying less in taxes this year. Remember, retirement savings lowers your tax liability. For most retirement plans, the money put in reduces the amount of income you’re taxed on, allowing your money to grow tax-free as well.
- You’re spending less. Right now, you are not spending money on tickets for sports, concerts, movies, or museums. There’s no money spent at the bar, shopping for clothes, or vacations. Without all these drains on our cash reserves, the timing has never been better to invest more into your retirement, allowing this money to mature and grow your nest egg.
What to Do If Your Employer Cuts Its 401(k) Match
During the last financial crisis, over 200 U.S. companies suspended or reduced their 401(k) matches, affecting 4.9% of all participants. Fortunately, three-quarters of companies reinstated their match within a couple of years.
The consequences can be painful for savers, though; just one year of missing $4,040 in employer match (the average contribution), assuming 7% returns over 30 years would result in $30,753 in lost earnings.
If your employer has cut their 401(k) match:
- Focus on damage control first. If you need money to put food on the table or keep a roof over your head, it’s okay to build your emergency cash reserves.
- If you can, boost your contributions. If your job is secure, consider increasing your contributions to make up for the missing match. You might also consider opening up an IRA in addition to your 401(k) to take advantage of more investment choices and lower fees.
The Bottom Line
A short-term dip shouldn’t affect your long-term savings goals. That said, it’s worth checking your account periodically to see if you should consider adjusting your strategy to better align with your unique goals and risk tolerance.
There is no substitute for a quick consultation with a professional financial adviser. If you are interested in staying the course and starting or switching a 401(k) plan for small business, you can count on Ubiquity for affordable plans at a flat, fixed rate, with no AUM fees.