Pending Recession-Filter: Should I reduce my 401k contribution?
June 20, 2022 5:40 AM   Subscribe

YANM accounting/financial advisor, etc. The stock market taking a dive and talk of a pending recession has me wondering if I need to reconsider how much money I'm sending to my 401k. Like everyone else, I've seen massive losses in my 401k this year, to the tune of about 4 times what I've put in. I am *not* considering pulling money out, but I am wondering if it makes sense to lower what I'm putting in to a) keep from setting money on fire and b) have a little more emergency cash on hand. Is this a dumb idea?

Other relevant details - Currently contributing 12% with a 4% employer match, which puts me under the max contribution amount but not by a whole lot. I'm 43 and single with a solid job (knock on wood) and good salary. My 401k isn't where it should be for my age but given my earning potential I should be ok in the long run. I'm in decent shape financially otherwise - have a few months' expenses in savings and one consolidation loan that I should have paid off next year.

If I dropped my contribution rate to say 10%, that would give me an extra few hundred bucks or so a month that I would a) not lose and b) could pay down the loan faster or build up a bigger oh-crap fund with. My thought would be to return the rate to 12% or even 14% once things improve. I don't have a financial advisor or accountant, so I turn to you, MeFi. Thanks!
posted by tryniti to Work & Money (17 answers total) 3 users marked this as a favorite
Well, one take is that as the market declines, you're "buying on the dip" and it's a good opportunity to acquire many shares at a bargain price. I would carry on as you are, but only if you're quite sure that your job is recession proof (to the extent that any job is)
Look up "dollar cost averaging."
Having said that, an "oh-crap" fund is really important too. Without knowing the size of your current "oh-crap" fund, your living expenses, how secure your job is, it's really hard to say.
posted by Larry David Syndrome at 5:54 AM on June 20 [12 favorites]

An ability to reliably predict stock market movement (either up or down) would be worth billions of dollars. People with that talent are not going to be writing financial columns.

The bet that everyone takes with a 401k is that in the long run the market always go up. Unless you’ve got immediate needs, just ride it out.
posted by Tell Me No Lies at 6:22 AM on June 20 [11 favorites]

I think you're thinking about this backwards. You want to be buying now, when the per-share price is low, so that when things start to go up (even if that takes years), you have more shares as they do.

That said, if you paid the loan down that would be a good use of funds (or if your emergency fund is really small.) What you don't want to do is kid yourself and start to live on the extra money or spend a little extra here and there because you know you've got that extra few hundred going to other things. (I mean, within reason...just pointing out the pitfall.)
posted by warriorqueen at 6:29 AM on June 20 [4 favorites]

I am very much not a financial advisor, but my spouse is (note: he is not your financial advisor), and we are putting a little more money in retirement accounts now, not less—the idea being that we will reap the benefit when things start rising again. This is the way (at least as I see it). Of course, the usual caveats of making sure that you have a good emergency fund, etc., still apply.
posted by cellar door at 6:32 AM on June 20

My own approach to long term investing is this: It's long term. I try not to worry about when a red number shows up because I'm not liquidating at that moment. The only time a red number is actively bad is if it makes my real long term return lower than it'd be in a different financial vehicle, or if I plan to liquidate the asset soon. A 401k makes both of those things unlikely, so I just... sock it away like a squirrel.

Your own financial situation differs from mine a bit. The decision around this might revolve around the rate of your open debt and your anticipated cash flow situation. If the loan's cheap you might be best off keeping or raising your contribution rate.
posted by majick at 6:33 AM on June 20 [1 favorite]

If you don't want to invest right now you can still put that tax deferred money into your 401k and just...not invest it. There should be a money market or similar cash account option available. You'll never have the option again to put that money in once the tax year is up, but you can always rebalance the funds in there when you've got more appetite in the future.

If you go this route, make sure you slap yourself a calendar reminder every quarter or so to go back in and check on things. If you're not invested that money won't do anything (it will be losing due to inflation but not losing due to market dips)--which means when the market picks back up it won't be in a growth vehicle. Not a mistake you want to realize in several years.
posted by phunniemee at 6:47 AM on June 20 [3 favorites]

I wouldn’t reduce contributions unless you have a serious alternative spending or investing idea with that margin of your budget.
posted by michaelh at 6:50 AM on June 20

1. You can't time the market.
2. You can't time the market.
3. ... if you could time the market, wouldn't you want to buy low and sell high?
4. If your loan is high interest or your oh-shit fund is low, then sure, it makes sense to alter your financial plan, but that's about your plan and not to do with the state of the market today.
5. You yourself can contribute $20,500 in 2022 to your 401k. Your employer's contribution is on top of that.
6. You don't pay income taxes on what you contribute until you take it out, which means your 401k contributions reduce your tax bill in the contribution year. You do pay taxes at withdrawal, but the thinking is that you'll be retired and by then and thus in a lower tax bracket, so your total lifetime tax expenditure will be lower.
7. If changing your contribution reduces the amount of dollars your employer matches, dude you are giving up free money.
8. Read 6&7 again - these are real dollars dependent on just your choices and not on the state of the market.
9. You haven't lost any money. You haven't taken any losses. Why? Because you haven't sold any shares. When you log into your 401k and view the balance that's the current market value of your assets and it's what you'd get in actual dollars if you decide to sell. But, you haven't decided to sell and thus you have't lost any money. Earlier this year you had 4 shares of Apple and 2 of IBM and 1 of Burlington Northern and 2 of Target. You still have 4 shares of Apple and 2 of IBM and 1 of Burlington Northern and 2 of Target.
10. It's not just you. Nobody can time the market. Nobody. Uncle Dave says he can but he doesn't realize he's caught a couple lucky bounces. The next bounce won't go his way.
posted by everythings_interrelated at 6:51 AM on June 20 [14 favorites]

What is the interest rate on the loan? Unless it is very low, you should reduce your 401(k) contribution and get that wrapped up early. Paying off a 10% interest rate loan is like getting a guaranteed 10% return on an investment. You're not likely to get that from the market this year.

Once you're no longer paying off the loan, that will increase your free cash flow and at that time you can evaluate whether you want to punch your 401(k) back up or increase your post-tax savings fund.

Also, do you have an IRA (it sounds like you might be close to the limit for having one)? In general, you can do better with an IRA than what's available in most 401(k)s, so the recommended investment pattern is 401(k) - but only enough to get the match, followed by the IRA up to the max, followed by more money in the 401(k). With the IRA, you can contribute to it as late as tax day of the next year, so that also gives you some flexibility as far as increasing your emergency fund now but still getting it tax sheltered.
posted by Candleman at 6:55 AM on June 20 [4 favorites]

I was digging through old 401k statements and determined that I’ve only “lost” 1 year of gains, so far. The plan administrator was kind enough to put on their dashboard that I’ve still averaged an annual 7.8% in returns over the past 20 years. Some of which was certainly made from contributions during the ‘08 housing bust market.
posted by hwyengr at 7:01 AM on June 20 [1 favorite]

Here is a video about dollar-cost averaging. Basically, when the market is low, you are still putting the same amount of money in, so each dollar is going further.

It is kind of like stocking up on toilet paper when there is a good deal. Your dollar is buying more toilet paper rolls when toilet paper roll prices are down. Then, when the price of toilet paper is back up to a normal price, you have more rolls than if you had 'timed the market'.

That having been said, if you don't have emergency cash at hand, or have severe debt, you may want to address those issues, especially since the cost of borrowing may go up. Whether that should affect your retirement donations is a more gray area of advice.
posted by MollyRealized at 8:08 AM on June 20 [1 favorite]

I've seen massive losses in my 401k this year, to the tune of about 4 times what I've put in.

I'd be gunshy about investing too with losses like that. How long have you had a 401k? Doesn't seem to be that long if 4X is true, and you don't have a super long time left to grow your investment - about 20-25 years (so minimum 1-2 other downturns) before you have to move to less volatile investments.

I consider a 401k to have a 25-30 year timeframe of equity investing, and you are a just on the verge of that.

So if you can't invest, your only other option is reduce your outflows. It's a tough call to pay down your debts vs invest. If you think you have 30 years left of work for equity investing, then ride it down. But if you feel you want your career to be shorter than that, then I'd pay down the debts.
posted by The_Vegetables at 8:35 AM on June 20

You can't time the market, and if you're young you definitely shouldn't try, but I do think if you need the extra emergency savings or whatever, yeah, it makes a.lot of sense to save more and contribute less.
posted by J. Wilson at 8:40 AM on June 20

Yeah, if you reduce your contributions now, you are not purchasing when prices are lower. If you truly believe all is crashing and won't recover, then you'd want it all out, no? If you think the market will go back up, the thing to do is to keep investing that same amount (or more!) because you stand to gain more.

You are 43, eligible for retirement at what, 67? So that's 24 years. You aren't buying for now. If you can at all cultivate an ability to not be fully aware of the day to day amount of your retirement funds that you don't need to access for a few decades, it can help a lot.
posted by bluedaisy at 2:24 PM on June 20

Do you have the ability to look at yourself and determine, emotionally and practically, why your 401(k) is not where you want it to be? Were you focusing on other financial priorities? Did you cash out your 401(k) when you changed jobs? Did the market drop and you sold your stocks in favor of safer investments?

The reason I ask is that the financially optimal decision is important input, but the emotionally optimal decision is really the one that controls. It's easy for me, who will not live with the consequences of the decision, to tell you that buying stocks as the market is going up, and not buying them when the market is going down, is the worst thing you can do, financially, aside from selling at the bottom of the market. But it's an important clue to knowing thyself that your reaction is to pause your investing.

So I would give two pieces of advice. One is to gradually switch your investment to something more conservative. If you have access to a target date fund, I would move up that date. E.g., a 40-year-old person who intends to retire at 65 would be invested in a 2045 fund, but you might move that to 2035, or even 2030, if you're feeling very conservative. It will reduce the more volatile stock investments and increase the less volatile bonds. Are you leaving some potential returns on the table? Of course. In general, more risk is more reward, over a long period of time. But if a more conservative investment is going to give you the peace of mind to keep contributing in "good" times and bad, it's absolutely worth the tradeoff. Second is to avoid checking your account or any financial news. It's irrelevant to someone who hopes to retire in more than a decade. Financial firms really lay this on thick, flashing red numbers and arrows everywhere. As if anyone who isn't a literal stock broker or fund manager needs that level of information on a day to day or even month to month basis. Even the general media gets in on the act: how many stock market charts have you seen on the front page in the last month? How many did you see a year ago when the market was going up at 10-20% per year? Fear gets attention, steady upward returns do not. Set an alarm on your phone to check, at most, every quarter.
posted by wnissen at 2:26 PM on June 20

I am wondering if it makes sense to lower what I'm putting in to a) keep from setting money on fire

So, surely, since you've been investing in equities to this point, you understand that you are investing for the long term and, with 25+ years to go, short-term dips aren't actually relevant to you.

But seeing those negative numbers suddenly convinces you that investing is "setting money on fire." In fact, if you believe it's worth staying in the market at all (which you do, as you're not planning to withdraw all your money or shift it to a money market fund within your 401(k)), it should be apparent to you that any buying now you do should be at a discount, and that waiting "until things improve" should mean that you would be paying more for the same purchases.

Ordinary people who are lucky enough to be able to save usually mess up investing for retirement in one of two ways: being ignorant about the facts (as far as they can be known, anyway, which is only so far), or being unable to manage their emotions. You have now gained the important self-knowledge that you are (like so many of us) in group two. The solution is to set your plan in advance, automate it, and forbid yourself from checking it regularly. Outsmarting your own psychology is key to personal finance.
posted by praemunire at 9:37 PM on June 20 [3 favorites]

Lots of good reasons above. I'll add: you lose access to the tax-protected space at the end of the year. You cannot go back and make up for this year's contribution later - once the year closes, that opportunity is gone. Use it while it's there.
posted by Dashy at 6:10 AM on June 21 [1 favorite]

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