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

If you’re wondering if you should stop funding your 401(k) because you’re having a hard time making ends meet or are nervous about the economy, you aren’t alone.

A 2023 CNBC Your Money Survey finds that “three quarters of working Americans (74%) say they are stressed about their personal finances these days.”¹

As a result, many investors may be thinking of cutting back or ceasing to fund their 401(k)s.

A recent study by Allianz Life Insurance of North America found that American workers are struggling with inflation, and one of the main ways they are “handling” their struggles is by cutting back or halting their 401(k) contributions.

Here are some of the findings:

54% halted or reduced their 401k and other retirement savings between July and September.
Stressed millennials were the most likely to stop or slim their retirement savings due to inflation (65%), followed by Gen Xers (59%) and baby boomers (40%).²

Even though times are tough, 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.

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.

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.

According to the June 2021 National Retirement Risk Index report from The Center for Retirement Research of Boston College: “Half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes.”³

That’s not a positive outlook for many Americans.

A study by Allianz Life also found that “nearly three in four (72%) [Gen-Xers] worry that if they don’t increase their retirement savings soon, it will be too late to have a comfortable retirement.”⁴

The same study found, “More than four in ten (43%) people say they do not expect to be financially ready for retirement when the time comes. […] Meanwhile, one-third (33%) of Americans expect to live to 100, with an equal third (33%) predicting there is a better than 50% chance they may outlive their savings. At the same time, more than one in three (36%) report that they have not proactively taken any steps to address this concern.”⁵

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.

For example, if you’re getting the company match and you have a ton of debt, you may want to divert some of it to pay off debt.

The key here would be to contribute enough to still get the company match and divert additional retirement savings funds to pay off high-interest debt. This is because the company match is essentially free money that your employer contributes to your retirement account based on the amount you contribute.

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.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

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