The COVID-19 pandemic has prompted some younger workers to make a change that could cost them. As many as 21.1% of workers who are 10 or more years from retirement have suspended contributions to their retirement accounts, according to a new study from financial management site Personal Capital.
For some, this makes sense. If you've suffered a job loss or cut in income and are worried about paying bills, retirement investing should be on the back burner. And if you don't have an emergency fund, you may want to focus on building one during these turbulent economic times, even if retirement saving has to wait.
But if you've pulled back on investing out of concern about what the stock market will do during a COVID-19 recession, you may want to rethink that because suspending or reducing your contributions right now could be very costly.
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Why you shouldn't suspend your retirement account contributions
For most people, building a large enough nest egg takes a lifetime of contributions. And the sooner you start making them, the easier it is to save enough because your money earns compound interest.
When you pause your contributions, you don't just lose the money you would've invested; you miss out on all the returns that money would have earned. And that just means you have to save more later to make up for it.
Missing out on investing now, during a recession and amid market volatility, could be even more costly. That's because economic downturns present buying opportunities that enable you to maximize your return on investment (ROI).
If you purchase stocks or index funds when they're on sale, you benefit from an inevitable economic recovery and will almost assuredly earn a better ROI than if you buy only when things are going well. The goal is to buy low, and you're better able to do that if you aren't afraid of investing when the going looks rough.
Not convinced? Just consider the advice of Warren Buffett, one of the world's best investors: Be fearful when others are greedy, and greedy when others are fearful.
Recessions and times of economic turmoil tend to breed fear, but that's why it's so important for you to stay the course right now and even consider increasing the amount you're investing rather than cutting back -- especially when you're making retirement investments that you'll hold for the long term.
Find the money to contribute if you can
If you're taking care of the basics and don't have spare cash, try not to worry. While it's unfortunate you have to stop investing, meeting your current needs should take precedence; you can make up for lost time now by investing more later.
But if you have any extra money after paying for the essentials, such as cash from your stimulus payment or unemployment checks, consider putting some of it into the market. This could mean cutting back on discretionary purchases or reworking your budget, but it's worth it if you are smart about how you invest, minimize risk, and end up with enough cash as a retiree.
