Your Two Bits

Since last week’s post regarding whether to keep contributing to a 401(k) if your employer drops the match, I have had a few discussions with people on this topic. Last week’s post was written assuming that you are going to keep contributing to some form of retirement investment; however some people have asked, if they should stop contributing to all investments. The short answer is “No.” The longer is answer is “It depends, and here’s why.”

In general, you really don’t want to lose any of that retirement savings momentum. That’s why the short answer is “No.” However, there may be exceptions. One person asked if they should stop contributing to the 401(k) so that they could build up their emergency savings. My gut reaction was to say to keep contributing; however, as I pondered the issue, I changed my mind a bit.

First of all, if a company is freezing its 401(k) match, that is most likely because they are struggling financially to some extent. If the company is struggling financially, you may have reason to worry about your job. Depending on your debts and amount of emergency savings, you may want to build your cash reserves in the short term. In this case, I am more open (albeit still very nervous) to stopping contributions to the 401(k) and not investing anywhere else. However, my openness comes with some caveats.

Create a Plan
Do not stop making contributions until you have a plan of action in place. This plan should include a few critical elements:

1. Determine how much money you are going to save. In other words, at what point will you be ready to begin contributing again? Write down an actual dollar value.
2. Once you reach your desired dollar value, are you going to begin contributions to your 401(k) or invest in something else? If something else, have that something else already selected. I would suggest even going so far as filling out the application with all but the signature and date.
3. Determine an alternate investment, in case re-investing in your company’s 401(k) plan is not an option, either because the company no longer exists, or your position no longer exists, or you have to wait for open enrollment.
4. Save every penny that was going to your 401(k) when you stop making contributions.
5. To help you save every penny, at a minimum save the money in a savings account that is separate from your general checking account—even better would be an account in a completely different bank. I would look for something like a money market account; it might give an interest rate that helps you keep up with inflation.

Hopefully, you aren’t in a position where you feel the need to stop all contributions; however, if you are, at least have your “exit strategy” in place.

That’s my two bit’s worth. I’m interested to hear what thoughts others have.

Related Posts:

• Why Ride a Loser?
• Should I Change My 401(k) or Retirement Investments?
• Should I Pay Off Debt or Invest?
• If My Employer Drops the 401(k) Match, Should I Still Contribute?