In recent months, the stock market has been a roller coaster ride with occasional deep plunges, while the price of eggs and other necessities continue to climb. When prices keep rising and there is talk of a possible recession, it can be tempting to reduce—or even eliminate—your 401(k) contributions to have more cash on hand. But experts say, unless you’re facing a true financial crisis, it’s best to keep contributing to your 401(k) plan even in a bear market.
Here’s why: Historical data shows that, even when stocks go down, the investors who stay in the market long enough, at least five to 10 years, end up with a higher rate of return.
“The stock market throughout history has always hit a higher high than the previous high after it’s dropped,” says Brett D. Horowitz, principal and wealth manager at Evensky & Katz/Foldes Wealth Management, in Coral Gables, Florida. The stock market achieved historic highs after recovering from 2008 losses during the Great Recession and 2020 losses during the COVID-19 pandemic, he says.
If you’re still unsure, financial experts offer five reasons to continue 401(k) contributions even when the stock market is down.
1. It’s hard to time the market
Experts agree that figuring out when to stop and then start your contributions is tricky. You would have to correctly time the market twice.
“If you decide to lower your contributions or even, say, move money out of the market, that’s one part of the equation, but the second part of the equation is how do you get back in?” says Stratton Harrison, founder and financial adviser at Vita Wealth Management in Chicago.
For instance, if you stopped your retirement contributions during the Great Recession and never contributed to a 401(k) again, you lost out on one of the greatest bull markets of all time, Harrison says. And you didn’t just miss the market rebound, you also lost out on the power of compounded interest.
2. You disrupt a savings habit
Contributing to a 401(k) plan guarantees that you are saving for the future. With an employer 401(k) match, you have the opportunity to save even more money. However, if you suspend your contributions, once that extra cash hits your paycheck, it’s much harder to divert that money into a savings account.
When people stop contributing to a 401(k), many simply end up spending more money, and once you get used to that, it’s a hard cycle to break, says Carla Adams, founder and financial adviser at Ametrine Wealth in Lake Orion, Michigan.
“What happens if you stop contributing to your 401(k) and you forget that you did that?” asks Patrick Huey, owner and principal adviser at Victory Independent Planning LLC in Camas, Washington. “It’s not just the habit, it’s the discipline… We now live in a world where… there are a million subscriptions for entertainment out there that people will sign up for and then forget that they have.”
3. You’ll accumulate more wealth over time
Statistically, the market goes up more often than it goes down so, if you continue your contributions, you should end up with more money over time, Harrison says. “If you’re contributing consistently and you’re getting employer matches or employer profit sharing contributions, it can mean significant dollars over a long period of time,” he says. There is a risk to limiting 401(k) contributions during your prime working years.
If someone saving $500 a month in their 401(k) decides to pause contributions for just one year, they could potentially miss out on tens of thousands of dollars in growth by retirement, Huey says. It’s not just the skipped year’s contributions themselves. It’s the missed compounding effect that makes the financial loss even greater.
Keep in mind that when you invest money for retirement, you’re not investing for the short-term, says Crystal McKeon, chief compliance officer at TSA Wealth Management in Houston. You’re looking at the stock market’s potential over a 10-, 20- or even 30-year long-term horizon.
“We’re not day traders. We don’t invest for today. We don’t invest for tomorrow,” she says. “If you are still investing in a 401(k) and have no plans to retire in the next five to 10 years, you have a long time to ride out temporary downturns.” However, if retirement is on the horizon, you should be gradually shifting your investments toward lower-risk assets, like bonds and money market funds.
4. A stock market drop is an opportunity
Rather than having a negative view of a stock market drop, look at it as an opportunity, says Horowitz. “The stock market is the only place where people run away when stocks are on sale,” he says. “If airlines or TVs or stores had a sale, we would all go running and feel very good, yet the stock market invokes a different feeling.”
Assuming the market recovers, and it always has, buying “low” through regular contributions is not only a great way to establish forced savings, but it means you’re buying more stock at a lower cost, Horowitz says. When stock prices drop, your contributions buy more shares, setting you up for stronger long-term growth when the market recovers. Purchasing more shares in a down market should boost your long-term performance.
5. You can’t control the markets, but you can control spending
Instead of focusing on the markets, which you can’t control, focus on what you can control by reducing personal spending, creating a more flexible budget and postponing discretionary spending, Huey says. “This approach helps manage today’s economic pinch without undermining tomorrow’s financial future,” he adds.
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