The coronavirus pandemic has changed a lot about American life. Many people are facing job losses, a reduction in income, and a decline in the value of their stock portfolios.
As you watch the volatility in the stock market and consider all the economic uncertainty around you, it may be tempting to stop putting money into your 401(k).
But while this may seem like a good idea on the surface, there are three huge reasons why you want to keep those contributions going if you're able.
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1. Now is a great time to invest
The stock market has had some very bad days recently, erasing many of the gains made over the past three years.
But that's actually good news if you're investing now and there's a long time before you retire. That's because the market downturn caused by coronavirus means stock shares of many high-quality companies are on sale.
If you use your 401(k) contributions to build a diversified portfolio that provides exposure to different sectors of the market, your investments should perform well over the long term. In fact, decades of market data show it's reasonable to expect around a 7% average annual return on funds invested in the stock market, after accounting for inflation. And if you buy in during a downturn, your gains may be even higher since you're buying at a discount.
If you're very close to retirement, you may not have a lot of time to weather a bear market, but that doesn't mean you should stop putting money in your 401(k). You just may need to shift your asset allocation so funds you contribute are put into safer investments. That way, your account balance will still grow, and you'll have a bigger nest egg to rely on in your later years.
2. An employer match is free money
If your employer matches your contributions, you'd literally be passing up free money if you stop putting money into your 401(k). The contributions your employer makes mean you get a 100% return on matched funds. You don't want to give that up even if you're worried about putting money into the market right now.
3. Your 401(k) provides tax savings
You make 401(k) contributions with pre-tax dollars, which provide significant savings. If you invest $10,000 in your 401(k) that would've been taxed at 22%, your $10,000 contribution actually reduces your take-home income by just $7,800 thanks to the $2,200 in tax savings you get.
Don't stop 401(k) contributions unless you have to
If you're facing the loss of a job or if your household income has been cut and you need every dollar, you may have no choice but to suspend 401(k) contributions.
But if you have other places in your budget you can cut, aim to continue your contributions if at all possible. Your future self will thank you when you've got a big nest egg in your later years because you stayed the course.
