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Should You Cut Back on Your 401k During a Down Market Cycle?

Should You Cut Back on Your 401k During a Down Market Cycle?

February 14, 2023

Oof. This has been a rough year. I’m not just talking about 2023 (which we’re just starting); I’m talking about the build-up to this point as we’ve navigated a roller coaster of a market and painful inflation.

Here’s what we know:

  • 62% of employees have reduced their short- and long-term savings contributions amid high inflation and concerns about a possible recession.
  • 31% have reduced contributions to their 401(k) plans. (CNBC)

With these statistics in mind, let’s discuss when and if you might need to make a change to your retirement contributions.

Why is stopping your 401(k) contributions often a mistake?

With the market being down, A LOT of people have cut back on their 401(k) contributions; they don’t want to put money into their 401(k)s just to see it disappear.

Fun fact: Every 401(k) must have a stable value/fixed option available. This means that you can invest money in your 401(k), and still receive all the tax benefits of doing so, but not put the money in the stock or bond markets.

So, if you are among those who have cut back on 401(k) contributions due to the recent market, start those contributions up again and consider directing them to the stable value/fixed option. Better yet, view your 401(k) as a long-term investment and consider buying into the markets when they are priced low so that you can sell high in the future.

Should you cut back on contributions if you’re feeling the pain of the rising cost of living?

Cutting back on your 401(k) may be necessary to make ends meet - just make sure you cut back with a plan to increase contributions in the future.

I recommend following the one-third rule moving forward: Every time you get a pay increase or bonus, put one-third of it towards increased 401(k) contributions. For example, if you receive a 3% raise…

  • Put 1% (one-third) towards your 401(k).
  • One percent goes to taxes (depending on your type of 401(k) contribution, this could be less).
  • One percent goes into your checking account.

This way, you still feel the impact of your raise in your checking account, but you don’t miss the increased savings.

How will inflation and the cost-of-living increase affect your future retirement?

Unfortunately, with inflation being higher than most people anticipated in their financial plans, the cost of living in the future will also be higher in the future.

Now may be the perfect time to increase your savings to account for this; no one wants to be forced to change their lifestyle in retirement because they haven’t saved enough. With costs on the rise, you will need to have saved a larger amount in order to generate the income that you will need in the future to cover expenses.

Remember: Don’t let your emotions take over when it comes to your money.

When it comes to cutting back on your 401(k), it’s often based on an emotional decision; we think we see a problem and often react before getting the facts.

If you look at market returns for the last six months, they are actually positive. Yet, when I’ve asked my clients how they felt the market performed during the last six months, they all tell me terribly. I’m not saying that the market is guaranteed to go up in the future, but chances are better than not that we may see an increase.

I understand that it can sometimes be hard to separate from those emotions while making big decisions. That’s why it’s often important to get impartial advice from a financial professional. If you find yourself on the verge of making a big change with your retirement savings plan, let’s talk about it.