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Protect your 401K money series (post #2): should you still put money into 401K now?

October 12th, 2008 · No Comments

First, let’s talk about who probably shouldn’t be putting money into 401K.

  • Assuming you’ll be laid off tomorrow, and your household won’t have income for 6 months, do you have enough cash to sustain your current level of expenses (e.g. mortgage, car payment, other monthly bills, etc.)? If you don’t have enough cash reserve to cover 6-month expenses, I think you should stop contributing to 401K, and focus on saving for your cash reserve.
  • Are you a savvy investor who has made money during the market crash in the past 3 months? I knew quite a few people who had made a kill recently. If you’re a very savvy investor, the returns you get from the stock market will likely be much more than the tax saving and company matching benefits of 401K. I’d use the cash to continue to invest. There should be some excellent "buy low, sell high" opportunities in the near future. But, don’t get too cocky because you made some money lately — keep your head cool! 🙂
  • Have you lost a significant portion of your retirement money recently? Psychologically, you need some time to recover. Plus, you need to do some damage control — make sure you figure out a sound strategy for your current 401K portfolio. Until you figure out what to do with your current 401K money, I wouldn’t add any money into it.

Second, for most people, you should still continue to put money into your 401K account, given its tax saving advantage. Plus, some employers offer 401K match, which means instantly return for some employees. The key thing here is to be conservative. There are way too much regulatory and finance uncertainties here — I.e. with a new president comes on board, there are a lot of uncertainties about how the government will implement the bailout package, and what new policy changes they will make. Additionally, nobody really knows how big a black hole "credit swap" has given us. Until more information become available, I suggest you to hold your money tight (unless you’re extremely financial savvy and know what you’re doing,). 🙂

Third, if you’re young professional who just started saving, you should definitely put money into 401K. You’re single and likely to be in a high tax bracket. There are tremendous saving for you to put money into 401K. Plus, if you get laid off or don’t have enough cash to live on your own, you can still move home for a few months.

Like many things in life, there is no simple "yes/no" answer to this question. But, I hope the aforementioned 3 tips can help you make an informed decision on whether to put your hard-earned money to 401K.

Do you agree or disagree with my recommendation? What’s your strategy? I’m curious to learn about other’s take on this important issue.

Related post:

  1. Protect your 401K money Series (post #1): What lessons I have learned (so far) from the current economic crisis?
  2. Your 401K Account and U.S. Treasury Temporary Guarantee Program for Money Market Funds
  3. Do you have 401K money in Money Market fund? It might not be safe!

Tags: Beat Recession

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