Why You Should Continue to Contribute to Your 401(k) If You Can

What we’ll cover:

• The decision whether to continue or pause your 401(k) contributions may be affected by many factors, like how you feel about your current job, income and financial security
• If you’re able to, it can make good sense to keep making 401(k) contributions and consider whether your budget allows you to save more
• Saving for retirement is an important goal that you want to maintain even during difficult times

As we adjust to new routines these days, many of us are re-evaluating various aspects of our daily life. As the economy continues to plod forward, financial concerns remain top of mind for almost everyone. 

“Stay invested” is something you’ve probably heard over and over again in times of market volatility. But what does that mean when it comes to your 401(k)? One popular question among savers is whether they should hold off on contributing more money to their retirement plan. 

The hesitation to put more money in is understandable. It’s a natural reaction when your 401(k) balance takes a sudden dip from current events, leaving you to wonder if your portfolio will ever bounce back from the losses suffered during this uncertain period. 

Take heart: Just as there have been historic downturns, there have also been recoveries. It may be hard to see the logic at the moment, but there are good reasons to continue contributing if you’re able to. With investing for retirement, it’s important to take the long view despite current market disruptions.

Should you continue to contribute to your 401(k)?

As with many questions about personal finance, the answer is: It depends. Because when it comes to money, it’s always personal. Everyone’s situation is different. 

The decision depends on a number of things, including your current financial health and priorities. If you’re in a situation where you might lose your job or anticipate a cut to your income, then retirement savings might not be a key priority for now. This is a situation where you might need to scale back or suspend contributions, so that you can focus on building up an emergency cash reserve, especially if your cash savings aren’t where they need to be. 

Having enough cash on hand helps ensure that you’re able to meet short-term obligations (e.g., essential expenses, debt payments, etc.) without the risk of taking on debt to do so. You don’t want to give yourself more headaches in an already stressful situation. 

On the flip side, if you’re in a more stable financial and work situation – that is, you have solid job security, income security and room in your budget – then generally it might make sense to continue your 401(k) contributions. 

Let’s take a look at some of the considerations. 

Stocks may be on sale now

No doubt headlines about the drops in stock prices can be unsettling even for seasoned investors. But every challenge also presents an opportunity: A drop in stock price means that it is on sale, assuming of course the price goes back up.

If a portion of your retirement plan is allocated towards stocks, by simply maintaining your regular 401(k) contributions, you’re in a position to take advantage of potentially lower stock prices. That’s because your contributions essentially allow you to purchase additional shares automatically.

You may also want to see whether you’re able to allocate more of your budget to retirement savings right now. Social distancing means going out less, which means money you normally earmark for dining out or entertainment could be redirected to your 401(k). 

Keep in mind that assets in a 401(k) plan are subject to market risk. When markets are volatile, one potential risk is that stock prices might continue to fall. In times of economic uncertainty, it’s important to do your research and check in with a retirement advisor to discuss any big changes you might be considering regarding your contributions. 

You don’t want to pass up your employer’s 401(k) match

If your employer offers a 401(k) matching contribution, this is another reason to consider staying the course. By stopping your 401(k) contributions, you would effectively be giving up the money that comes through your employer’s match. And as you know, when it comes to saving for retirement, every little bit helps. 

Also, don’t forget about the potential tax benefits of contributing to a 401(k). Typically, these contributions are taken out of your paycheck automatically on a pre-tax basis, so it helps lower your overall taxable income (though check your plan, as some have post-tax contribution options). 

But what if your company has suspended its 401(k) match to help cut costs during these challenging times? 

Unless there’s a need to pause or lower your contributions, continuing to contribute will help grow your retirement nest egg. If you’re dealing with the loss of an employer match, take a look at your budget and see whether you could increase your contributions to make up for that loss. 

Again, staying in the game can increase your chances of reaching your long-term retirement goals. 

Parting thoughts

The coronavirus has disrupted a lot of familiar routines. As we make adjustments to our daily life, many of us wonder whether there should be changes to our savings routine as well. 

When it comes to the question of your 401(k), it’s important to take a moment and evaluate your financial situation before making any decisions to pause or lower your contributions. 

Here are two reassuring points to keep in mind: First, historically speaking, markets have recovered from downturns. Bear markets are brutal but have not lasted forever (even though it might feel otherwise). People who stick to their long-term savings plans are generally putting themselves in a stronger position to reach their retirement goals. 

Second, if you’re still a long way away from retirement, time is your friend. The longer you’re able to stay invested, the more time your portfolio will have to ride out the ups and downs of the market.

The bottom line: If you can afford to, don’t give up on your 401(k) when the market hits bumps in the road. By continuing to contribute, you are working towards your retirement goals.