Why Now Is NOT the Time to Stop Funding Your 401(k)

There are many reasons why you should continue to contribute to your 401(k) – even when the market seems worrisome and inflation is pressing in.

There are many reasons why you should continue to contribute to your 401(k) – even when the market seems worrisome and inflation is pressing in.

Gains over Time
It is easy to look at the market and worry.
But history has shown that it is wiser to continue contributing to a 401(k) even during a financial crisis.
For example, at the bottom of the financial crisis of 2008/2009, the S&P 500 was 683 points. Today, it is around 4200 points.
That’s over 5 times off the lows of 2008/2009.
I was 41 then, and now I am 55. By not selling in 2008/2009, I was able to continue to significantly grow my retirement savings
If you stopped contributing during the 2008 crisis, you would have missed this huge rally off these lows, and that doesn’t even include your employer match.
Here’s another example: Just 2 years ago, in March of 2020, the S&P 500 fell to 2304 points, but today we are around 4200 points. It is up over 60% off the lows of 2020!
While the past does not always repeat itself, we investors can use it as a guide to make better decisions when faced with the question: Should I pull back or stop funding my 401(k)?
It’s tempting to stop contributing when we feel as if we are facing a financial crisis, but time has proven that it is wiser to keep contributing and trust that there will be gains in the future.
[Related Read: Investing More in Your 401(k) May Help You Beat Inflation]
Social Security Is Not Enough

We have heard for decades that Social Security should not be the only income you have in retirement.
Social security should be considered your base income, but it will not be enough for you to retire. It just won’t.
To retire comfortably, you will need to draw off your 401(k) for additional income.
Since we know that Social Security isn’t enough, we should do all we can to contribute as much as possible to our 401(k)s – not less.

The Tax Break Is Worth It
You get a tax break for every dollar that you invest into your 401(k) with pre-tax dollars.
Let’s say you make $50,000 per year, and you put in 3% of your pay into your 401(k). This is $1,500 and drops your taxable income down to $48,500.
The tax break for contributing to your 401(k) will go away if you stop funding your 401(k). And, come tax time, you may find yourself with a larger tax bill to pay.

Dollar Cost Averaging Is Smart
Follow the dollar cost averaging strategy with your 401(k) from every paycheck.
This means you invest a sum of money from every paycheck, regardless of the current share prices.
Dollar cost averaging allows you to buy more shares when the market is lower and fewer shares when the market is high.
Over time, this could accelerate your holdings and your returns.
It also keeps you from making emotional decisions in the moment that you may regret.

Up to 100% Return on Company Match Contributions
Check with your employer to see what your company match is – and do what you can to at least contribute that amount.
Let’s say they match dollar for dollar up to 3%.
If you make $50,000 per year, 3% of this is $1,500.
The employer would then match this $1,500, thus giving you a 100% return on your contributions.
It’s basically free money.
Even if you decide you need to stop contributing as much to your 401(k), make sure you contribute enough to get the company match.

When It May Make Sense to Stop Funding Your 401(k)
Now that we’ve covered what you need to consider before you stop funding your 401(k), it’s time to discuss when it makes sense not to fund your 401(k).
If you can still manage to contribute and also work toward other financial goals, such as paying off debt, it may make sense to pull back on your contributions.

If you have high-interest debt, it may not be a bad idea to strike a balance between saving for retirement and paying off debt.
Create a budget that prioritizes debt repayment while still allowing you to contribute enough to your 401(k) to receive the full company match.
Another time when it may make sense to stop funding your 401(k) is if you are nearing retirement and want to pay off your mortgage.
Paying off a mortgage as you near retirement makes sense only if you have additional funds to make this happen. This is usually your largest payment, and it could drastically increase your income in retirement by paying this off early.
In this case, maybe pull back on funding your 401(k), but do not stop completely.

[bluegillmich]

3% contribution is not enough, i most likely will be going to 27% contribution after the first of the year. My company match is 50% up to $2600 per year.