25 Sep Should I slow 401(k) savings?

Q. With the stock market seeming iffy, I’m thinking of slowing my 401k contributions because I can’t have them invested in cash. I would save the money on the side in a safe account instead. What do you think?

A. Nervousness about the stock market is not a good reason to slow 401(k) contributions.

But there may be other reasons, and better uses for your money.

First, everyone should have an emergency fund, said Anthony Vignier, a certified financial planner and attorney with Vignier Investment Group in Kearny.

He said in the event of a job loss, medical emergency or other unexpected situation, having an emergency fund worth at least six months of fixed expenses is critical. Having enough for a year’s worth of expenses is even better.

“If you don’t have an emergency fund or it’s underfunded, you should consider growing your emergency fund,” Vignier said.

If you have a significant amount of debt — particularly credit card debt — and are carrying large balances, you may want to consider reallocating some money to pay it off, he said.

“Paying 15 to 21 percent or more on average in interest on credit cards just doesn’t make any sense,” he said.

If your debt is under control and you have a stash of cash for emergencies, you need to review what investments are available in your 401(k).

Vignier said you can speak to your plan provider to get the details and for help with what options fit your investment profile. He said today, most plans have useful tools to make investing much easier and help you decide how to invest based on your age, how risk-averse you are and your time frame until retirement.

“All these are factors that should be the consideration for investing, not the day-to-day movements of the market,” Vignier said.

Stephen Craffen of Stonegate Wealth Management in Oakland said he never suggests slowing 401(k) contributions because of market uncertainty.

“In a bear market, you are buying low and get cost averaging benefits,” he said. “You will likely end up paying more in income tax and may permanently lose the opportunity to defer earnings on the amounts you would have contributed.”

Additionally, if your company offers a matching contribution, you could be losing an immediate 25 to 50 percent return on your money, depending on the percentage matched, Craffen said.

Regardless of market volatility, we generally recommend maxing out your 401(k) contribution when possible.

Craffen said if you are nearing retirement and have already started to slow your 401(k) contributions, you may want to consider depositing those savings into an IRA.

“Depending on your filing status and income, the contribution may be deductible,” he said. “Although 401(k)s differ from company to company, an IRA will likely have a larger selection of funds. You may be able to invest in conservative holdings, and keep a smaller portion in a money market/cash account.”
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This story was first posted in September 2015.