Can I stop contributing to my 401(k)/403(b) plan?
With increasingly widespread salary cuts, furloughs and layoffs, can you cut or cancel contributions to your retirement plan? For some, there is little choice. For others it may be a question of trimming a payroll deduction to have a bigger paycheck. Does this temporary decision matter?
There are three reasons why it does matter.
1. Recognize the implications of the decision—you are choosing to shift away from your long term goal of retirement for a short term purpose. Such decisions tend not be made consciously but in response to an immediate concern—think of unexpected expenses such as a job loss, vehicle breaking down, furnace or air conditioning replacement.
Every day you must make decision like these and, if you don’t have money set aside for those emergencies, you’ll look at other ways to raise cash. Sometimes that can mean stopping savings or putting the expense on a credit card. These decisions are the short term fix, but can have unintended consequences over time—less in retirement savings or added costs of credit card interest.
If you have to make this kind of decision, make a plan for when you are going to restart your savings plan. Put it on your calendar. I like using one’s birthday because it is your day—the day that you are doing things for you! And, what more important thing to do than providing for your secure future.
2. Saving for retirement is a habit and habits take a long time to form. Most of us form habits (good and bad) early in life. If you wanted to become a good saver, you had to work at it from your very first job out of college. Then, you needed to keep building it over time, year after year. If you then decide to cancel your retirement savings plan, all of that momentum is lost and you’ll have to start over. Chances are you will not feel good about cancelling it either. So, try to keep your savings habit intact, even if you have to cut back temporarily.
3. Buy low, sell high. We may look back on this period as one of the best to be investing. Recessions can be scary when volatile or falling stock prices leave you feeling worried. However, when we later look back on those periods, it is easy to say, “If I had only picked up shares of XYZ investment when it was selling for one-tenth of its price today.” Of course, people tend to forget how uncertain and scary that time was when investments were so cheap.
As long term investors, we know that one of the best times to invest is when things look the worst. One way to make sure you don’t miss those opportunities is to continue to make regular, automatic contributions to your retirement plan, especially when the market is falling.
If you lose your job or your partner does, you may not have a choice about stopping your retirement plan contributions. But, remember that retirement is not going away; it is getting one year closer every year. The best long term strategy for a secure retirement is regular contributions from your paycheck that steadily increase a little bit every year.
Hang in there. We’re still here to answer your questions.
Lyman H. Jackson
617-653-3303
This week’s photo is from the apple tree in our backyard. It is an old tree that doesn’t have many years left but it is still producing beautiful flowers every spring and it smells great.
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