Should I reduce my 401k contribution while the economy tanks?
Posted on October 10, 2008 27 Comments
Here’s a question. I’m currently putting 10% of my salary into my 401k. Given how craptacular the stock market is doing right now, and that my fund is actually going down instead of up and hasn’t made any money this year – has actually been steadily losing money – would it make sense to lower my contribution to 5% until the storm has passed? I mean, I won’t be taking anything out that’s already in the account but right now it seems like I’m literally throwing my money away.
OK, I already know the answer is an emphatic “LEAVE IT IN!” but seriously, if I can put another 5% of my salary into a savings account while my 401k is tanking, why wouldn’t I? I’d bump it back up to 10% when things start looking up…
Enlighten me and give me some confidence, smarty pants-ies!
Category: Money
Tags: Retirement
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27 Responses to “Should I reduce my 401k contribution while the economy tanks?”
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October 10th, 2008 @ 6:09 pm
I would think exactly the opposite would be the case. Possibly reallocation to where your $$ are going, but not less.
My case – still in 20′s, so have a while before retirement. One can assume that the market will go up again someday. (Even if it takes 10 years) So by continuing to invest the same amount while everything is tanking – you are getting more stocks per dollar of investment. So any eventual upswing would net a greater return.
October 10th, 2008 @ 6:09 pm
No don’t do it Nicole! You could seriously miss out on the inevitable recover of the market. And since you have decades to go til retirement, it really doesn’t matter what the returns are this year. Plus, because of the lovely concept of “dollar cost average,” which basically means putting in steady amounts of money instead of trying to time the market, you are actually getting a great deal right now — better than earlier this year — on stocks. So it would be the absolute worst time to stop contributing.
October 10th, 2008 @ 6:29 pm
I agree 100% with the comments above. I work at a credit union and we just had a mandatory hour-long meeting yesterday on this very topic. DO NOT reduce the contribution to your 401k and put it in savings. Buy low. Do not time the market! You have YEARS to ride this thing out.
October 10th, 2008 @ 6:40 pm
absolutely agree. Think more about how many shares you are getting now. If typically your contribution equals 4 shares, let’s say and today it buys 10 shares, then a $1 more to the postive will be worth alot more to you!
October 10th, 2008 @ 6:53 pm
I can see the temptation, however if you are paid monthly it will be a while yet before you have to make this decision. I know my next contribution will be the last working day of this month. So, perhaps you too can wait and watch. Time will tell.I did slap some savings cash into a share certificate at my Credit Union. . a 4% return is better than .085.But I have not changed my retirement plan balance or future allocations. I am a 47 year old investor who saw the value sucked right out of my 13 years of contributions as of close yesterday. My total contributions are now beig devoured. Looking like that will be worse by close today. Simply said, don’t freak. Ride the wave, the trough will lead to a swell.
October 10th, 2008 @ 7:01 pm
Yes, in the short term, you will be better off. 3% is better than -15%. But I’m sure I don’t need to tell you that.
The problem with that logic is that we as finance bloggers are very familiar with the concept of coupons and such. Think of the current state of affairs as one giant coupon sale.
Would you buy all your groceries when they weren’t on sale? On purpose? Wouldn’t you rather buy them all while they are on sale to save yourself the money?
I have a couple of shares that I bought directly after the big market bubble (dot com bubble). Even after this week, I’m still ahead on those stocks.
Granted they are good stocks, and pay dividends and have even split since then. The point is that buying at an extreme low as we are seeing could make you very rich some day.
It may take a few years, but you’ll be glad you stayed with it.
Also, don’t forget to include your employer matching if you haven’t. In many cases, that’s an instant % gain that will help cushion the losses you are sustaining.
October 10th, 2008 @ 7:13 pm
I would also leave it the way it is. Your 10% will buy more while the market is down and remember, it’s a long way off before you are going to use your 401k.
October 10th, 2008 @ 7:21 pm
I just increased my contribution! The whole idea of investing is “buy low, sell high.” Well so now that the market is low, I’m trying to buy more. In reality you should contribute LESS when the market is way up and MORE when the market is down, if you’re going to adjust your contributions at all.
October 10th, 2008 @ 7:29 pm
Why do American’s want to buy everything on sale EXCEPT high quality businesses? As Tom Hanks said in “Big”…”I don’t get it”.
October 10th, 2008 @ 7:40 pm
Ha ha, you guys are awesome and I LOVED the way you passionately jumped in with NINE comments in 90 minutes!
I will stay steady! Thanks for the reassurance. I’m sure there are a LOT of youngsters pondering the same question out there.
October 10th, 2008 @ 7:51 pm
haha no problem Nichole – I think we have all been concerned with the way things are in the economy right now.
However – we have the advantage of time, so we can try to make the most of it for the long term. I am actually reallocating my sharebuilder account to try to take better advantage of the current market.
October 10th, 2008 @ 9:53 pm
Hey Nicole,
I just posted about how I regret not being able to contribute to my 401K for this year anymore. Like everyone else said, don’t do it! That would just be letting emotions take over from rationality.
October 11th, 2008 @ 4:21 am
This article from the NYTimes discusses exactly what you are thinking of doing.
As everyone else said – don’t do it! I haven’t, either. I posted in my blog about my roommate doing this and it’s a bad idea – you can’t time the market, so don’t try! (If you could, you’d be making millions.)
October 12th, 2008 @ 12:26 am
Just another vote for maintaining your current contribution. If you really feel the need to do something, you can adjust what you purchase with your contributions, and maybe buy some more bond funds instead of international index funds, but as everyone else said, you’re basically buying everything on sale right now. If I had more money to put in right now, I would! (I’m 27, so also have at least a couple decades before retirement)
October 12th, 2008 @ 9:20 am
I know it’s scary, but leave it in. . . just don’t look at the statements for a few years LOL!!!
Blessings,
Sher
October 13th, 2008 @ 6:41 am
You could change your allocation to mostly cash.
Don’t stop contributing. Your AGI will go up, and you’ll increase your taxes owed for the year. Always contribute, but change your allocation to put more into the money market (or other cash equivalent) fund.
Yeah, buying low is all great and all, but there is still more downside risk than upside at this point. Get the tax deduction, but let the money stack for re-allocation later. That way, once things start looking brighter (as you see it), you can use that dry powder to purchase assets across your entire 401(k) asset allocation spectrum.
Right now, I’m putting 55% of my 401(k) contribution into the cash equivalent. Once things look reasonably priced to me, then I’ll deploy that cash. And I’m still getting the maximum tax benefit from the contributions.
(Whether its a real cash equivalent is a completely separate conversation. I know far more than most about the MMF situation.)
Something to consider. Yes, positive returns (esp. on a risk-adjusted basis) are nice, but you get other benefits from the 401(k). Look at it holistically.
As for cash outside of the retirement accounts, I imagine you have savings vehicles of some flavor. You should be maxing those out as much as possible too.
Think holistically.
October 13th, 2008 @ 1:35 pm
I had the same dilemma, and actually decided to temporarily reduce my contribution from 10% to 6%…
October 13th, 2008 @ 4:59 pm
I agree with Jakob. I think that the writer should definitely reconsider where she is allocating her money. A 401k is still a good idea, regardless of the state of our economy. There are stocks that aren’t doing bad right now. And there are other places where she could put her money also.
Caleb
http://www.mefinanciallyfree.blogspot.com
October 13th, 2008 @ 7:08 pm
Leave it alone.
October 13th, 2008 @ 9:04 pm
Nicole – I will refer you to your post on 1/11/08 and my comment to that. Remember when you asked me how my 401(k) got so big? My answer was that I was plowing money in for the two years following 9/11 when everything was falling off the cliff. The markets eventually recover, and you get a nice big gain. Again, this pertains to retirement funds only.
Bob
October 14th, 2008 @ 8:51 am
Keep contributing. Yes, right now your net worth is going down. But things do even out over time. The only move I’d consider would be maybe getting a more conservative portfolio. Or, if you’re not morally opposed, “vice” stocks are always good in bad times: cigarettes, alcohol, etc.
Not completely pertinent, but still interesting and partially topical, I read an example in one of Liz Pulliam Weston’s book about retirement savings:
There is a pair of twins. One starts contributing at 22. She puts in $3,000 a year until age 32. Then she stops and never puts in another dime.
The second twin starts contributing at age 32, $3000 until they both retire at 62.
The first twin has nearly $100,000 more.
October 16th, 2008 @ 10:09 pm
I agree with the comments on not lowering your contributions. Since you are still young, you should take more risks. Also it may seem counter intuitive, but when the market is turned down, it’s the best time to invest since there is more room to go up.
October 18th, 2008 @ 12:07 am
I don't think you should lower your contributions to your 401k. You have a long time until retirement. Everyone experiences ups & downs from the market. If you continue to buy now, you're actually buying those shares at a discount because the market is low. As long as you have plenty of time before retirement, you should continue to invest.
I'm in my mid 20's & I'm still continuing to buy. I even reallocated my future investmens to be more aggressive than I already was.
October 25th, 2008 @ 11:19 pm
Hi cuz! I say leave it in or increase it:). Stocks are cheap now!!!
January 8th, 2009 @ 4:45 pm
Why is it that buy high and sell low only makes sense when it comes to the stock market?
Max out your contribution this year and reduce it to the company match when the market recovers and is strong.
Do you really need to ask this question, as a PF blogger? Amateur!
February 26th, 2009 @ 8:44 am
One point I would add to what has been said, is a slightly different way to frame the question. Simply ask yourself, “Do I think that my investments will be in good shape when I need to access them?”
In your case, because you have at least 30 years before you’ll access your retirement investments, how do you think they’ll be? That said, with all that time ahead of you, why not continue while shares are on sale?
It’s just like the current housing market: horrible time to sell, but an extremely good time to buy.
March 5th, 2009 @ 12:15 am
What if you’ve left your money in the market and you’ve lost it all? Is is possible to have a negative amount and when the market rebounds you will gain it all back and then some more?