Monday, October 20, 2008

Hunker down, resist urge to scale back 401(k)

ATLANTA (10/20/08)—As 401(k) balances shrink and the economy slides further into a recession, you may get the urge to take swift action to try to rescue what's left of your retirement savings. In most cases, you're better off not doing anything—at least for a while ( Oct. 13).

Contrary to what you may think, now is not the time to reduce the amount of money you contribute to your employer-sponsored retirement plan. You'd be forgoing tax breaks associated with tax deferral, turning down free money from your employer's match, and putting yourself at risk of not being able to make up for lost retirement savings after the crisis ends. Likewise, selling stocks right now is risky; you'd probably be selling low after buying high, which is the exact opposite of a wise investment strategy.

What's a smart investor with a 401(k) to do in today's economic upheaval?

Bump up your 401(k) contributions. By increasing the percentage deducted from your paycheck—with most stock prices in the basement—you're getting more for your money (Salt Lake Tribune Oct. 2).

Avoid taking money out of your 401(k). If you're not retired, you'll pay a penalty on top of cashing out near or at the bottom of the market.

Resist the urge to take a loan against your 401(k). Although doing so is considered a better alternative than simply taking money out, these loans are particularly risky if you suddenly lose your job and are forced to repay the loan. If you can't repay the loan immediately, you'll pay a hefty penalty.

Diversify. Make sure your portfolio has a mix of investments to reduce your risk, or select a target-date—or lifecycle—fund, which automatically shifts to more conservative fixed income investments as retirement years.

Shore up emergency savings. Without a cushion, any unexpected event—medical crisis, repair bill, school expense—could bust your budget.

Decrease your day-to-day expenses. You're going to need the extra cash for higher-priced goods and services and for emergency savings.

Finally, if your 401(k) has experienced significant losses, consider putting much more money into your retirement accounts, working longer, or a combination of both ( Oct. 6). By working more years than you'd previously intended, you're not only saving for a longer period of time and building a bigger reserve, you're reducing the number of years you'd be pulling money out.

For more information, read, "Flawed Assumptions Sap Retirement Savings" in Plan It: Retire Ready Toolkit.

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