Council Post: 5 Reasons Not To Reduce Your 401(k) Contributions In A Down Market (2024)

FAQs

Should you lower your 401k contribution when the market is down? ›

One of the best things to do during a stock market crash or a low financial point is to stay the course and not reduce your 401(k) contributions. In fact, some believe a bear market is the right time to increase the percentage of income you funnel into your savings if you can afford it.

Should you reduce 401(k) contributions during a recession? You should aim to contribute as much as you can to your 401(k) regardless of economic events. A recession is one of the best times to contribute to your 401(k) because the stock market is usually down. In other words, you can buy your investments on sale.

It's important to rebalance your portfolio regularly to make sure it is aligned with your time horizon and risk tolerance. Portfolio rebalancing involves buying or selling investments to a desired percentage allocation in your portfolio.

For example, if you reduce your contribution or stop contributing entirely, you'll have more immediate cash flow but will miss out on the benefits of compounding interest that come with investing long-term in a 401(k).

You might want to slash your 401(k) to nab that perfect, pricey home. But reducing your 401(k) savings could leave you worse off in the long run than sticking with an affordable home.

If you have low-interest rate loans and expect higher returns on the investments in your 401(k), it may be a good strategy to contribute to your 401(k) while chipping away at your debt—making sure to prioritize paying off high-interest rate debt.

Continuing to invest in a 401(k) during periods of higher inflation can offer some protection if you hold investments that move in tandem with rising prices.

The tax-free growth and those extra employer contributions will stall when and if you stop contributing more money to your 401(k). Most experts recommend contributing to your 401(k) for at least as long as you're working.

Even during tough times, there are reasons to keep up your retirement contributions, if you can.

Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn. How much you choose to allocate to different investments depends in part on how close you are to retirement.

What will happen to my 401k if the dollar collapses? ›

If the dollar collapses, your 401(k) would lose a significant amount of value, possibly even becoming worthless. Inflation would result if the dollar collapsed, decreasing the real value of the dollar compared to other global currencies, which in effect would reduce the value of your 401(k).

The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts.

But just as markets don't rise forever, they don't fall forever either. Don't reduce your 401(k) contributions, or the allocation of new savings to stocks, just because the stock market is struggling at the moment.

People who overcontribute to a 401(k) can be subject to consequences such as being taxed twice on the amount above the contribution limit of $23,000 in 2024 ($30,500 for those age 50 or older) and a 10% early distribution tax if you're under 59.5 years old.

Instead, the money is taken out of your paycheck before federal taxes on your income are figured. This is how you save on taxes today. Your 401(k) pretax contribution comes out of your paycheck first thing, lowering your taxable income. Then, your taxes are taken out of your paycheck based on the smaller income number.

Shielding your money from further market losses could be a potential benefit of a rollover. However, this may also limit your ability to recover gains when the market bounces back. During a volatile market, panic can lead you to sell your investments impulsively at rock-bottom prices.

If your income drops with no decrease in expenses — for instance, if you get laid off, demoted, start a small business, or take a lower-paying job — it may make sense to stop contributing to your 401(k) for a while to cover any shortfall.

The grim but good news is that the best time to take a loan is when you feel the stock market is vulnerable or weakening, such as during recessions.