Comments on Saving to Inve$t: Thinking of Reducing my 401K Contributions

Thanks for all the comments folks. Some great poin...

2008-10-10T16:41:00.000-04:00

Thanks for all the comments folks. Some great points made here. Just want to clarify 2 assumptions I made that led me to this thought process.

1. It assumes the market drops a further 30%. If this does not happen, reducing your 401K is not recommended.

2. My current 401K plan does not have the option of a money market fund as I can only choose a target retirement fund. If I could rellocate across my 401K, then this would be my preferred choice.

Anon - It is a relatively simple example as I was just trying to get the point across that you shouldn't just forget your 401K but treat it like any long term investment to see if it adds up. I still think buying all the way down can be a mistake because the opportunity cost of the cash lost is what you could have invested in other safer forms of investment. If you are have a 30+ year scenario then it probably is just easier to leave the funds in your 401K, but reallocate if possible.

Curt - I think maintaining a level of contribution to get the employer match is key - because this is essentially free money. If possible, reallocate within your 401K or use the funds to invest in other safer assets. I am sceptical of gold though. It is doing well now, but is too volatile for my liking.

rds - Yes I did assume it would be down 30%. After recent falls this is not as unlikely. Dow is about 8300 now, a 30% fall will take it to below 6000, which is possible. I am not saying Employee B can time the market exactly, but by avoiding most of the down turn, he would benefit more. Like I said above, this is just a point of view and depends on everyone's own situation. If you are far away from retirement and believe the market will recover in the next few months it is probably not worthwhile following the strategy I discussed.

Clyde. It does not and if it did then this would be the best choice because you get a safer asset class and the tax advantages. A Roth IRA may also be an option worth consdering.

SMP - Good asset allocation which I was trying to emphazize in this post. I just can't do it within my 401K so was trying to do it outside. I agree that when things turn, you can get more aggressive.

Hank - You shouldn't plan for 1 year and that's why you must get back in the market when they normalize. The $1000 extra of cash can be very useful for some folks right about now. As you allude diversification according to your age is important. I was just choosing to do it outside of my 401K because it was not an option within it. Long term a 401K is the best investment vechile, I agree.

Kyle - See above points, is not an option in my current plan.

You could always direct future contributions to yo...

2008-10-10T14:34:00.000-04:00

You could always direct future contributions to your plan's bond or stable value option. That way you'd still get the tax break without risking your savings in the market.

I'd like to say I can add to the convo, but anon a...

2008-10-10T13:53:00.000-04:00

I'd like to say I can add to the convo, but anon and rds seem to have hit it on the head. Shares. You're buying a lot more at a smaller price with the 15k. Furthermore you shouldn't be planning on 1 year return with your 401k; if I was 55 and saw the market fall, it would have been out in a heartbeat because it probably won't come back in a year 2 or even 3. But in 30 when I'm ready to retire, history says that it'll come back and I guarantee person "A" will be worth more than person "B" if history repeats itself...

Right now everyone should have the bulk of their m...

2008-10-10T12:28:00.000-04:00

Right now everyone should have the bulk of their money in their 401k in the money market fund. When the market gets better, then go back into mutual funds but for now stay defensive.

I second RDS's comments, and does your 401k offer ...

2008-10-09T18:08:00.000-04:00

I second RDS's comments, and does your 401k offer a money market fund or short term bond fund, where you could still get the tax deferral benefits while trying to time the market?

Andy - I think that there are two big problems wit...

2008-10-09T17:56:00.000-04:00

Andy - I think that there are two big problems with your example. First of all, as anon mentioned, you are assuming that all of your contributions during the down year all fall by 30%. This is unlikely. I think that it would be better to assume that the contributions themselves lose 15%. They will be invested over time, some near the top of the market, others near the bottom.

Also, I fund it very unlikely that Employee B would keep his money out of the market exactly long enough to miss the 30% drop but reap all of the benefits of the 20% rise in the market.

If you change these assumptions Employee A comes out ahead.

RDS
http://financialvalues.blogspot.com/

I think you should stop all contributions all toge...

2008-10-09T16:36:00.000-04:00

I think you should stop all contributions all together. But, for that matter, as you know, I don't think you should have put the money in your 401k in the first place.

This market correction is not like the last few short recessions. The market could be down for ten years, while inflation eats away at what little you have left.

It's time to consider putting some money in Gold - while it's still cheap.

I'm no financial expert by any means, but you migh...

2008-10-09T16:33:00.000-04:00

I'm no financial expert by any means, but you might be over-simplifying things. Your calcs assume that all your contributions are already made when the market crashes, and again when the market rebounds. In reality, you don't put your money in a lump sum - you add into the plan over time. So the guy that contributes more will purchase more shares than the other guy. If you assume some fund prices and do some dollar cost averaging I think you will find out that guy A will have more at the end of year 2. To me, the whole 401(k) strategy is not to look at plan value (I am not nearing retirement) but to purchase as many shares as possible. In this case, I get more bang for my buck when fund prices are low. Best case, the market stays low until a year before I retire, then goes up! To me, having the stock market crash means that things are now on sale and I can afford to buy into companies.