Don't Attack Your Retirement Savings
March 03, 2009
Many Americans have shifted their financial focus from investing for retirement to saving and paying down debt. While maintaining an emergency savings fund and paying down high credit card debt should be part of every household’s financial plan, many financial planners are advising their clients not to completely forsake their retirement plans. There may be valid reasons for reducing your monthly contributions to a 401K, profit-sharing plan, or IRA. First, if your company has stopped matching your paycheck contributions to your retirement plan the necessity to max out contributions is diminished. A second strong reason might be sudden economic pressure on your household from job loss or reduced wages which are making ends meet difficult. A third reason is to reduce retirement contributions in order to pay off high interest rate debt quickly. And finally many Americans are piling up cash in money market accounts, savings accounts, and CDs to save for a rainy day, which is an important consideration during economic recession.
Financial planners may not disagree with reducing your retirement contributions for the above reasons if they are temporary adjustments due to financial distress and if monthly contributions of some sort are still being made to your account. What will get your financial planner very agitated is either giving up on the stock market completely or cashing in your retirement funds early without exhausting every conceivable option for funds. Selling stocks and mutual funds when the market is down over 50% from where it stood less than two years ago certainly goes against the old adage, “Buy Low, Sell High.” But it also does not allow long-time investors to take advantage of dollar-cost-averaging in their retirement accounts. Americans who cash in their retirement accounts and take withdrawals face ordinary income tax and a 10% penalty on their withdrawn funds if they are under the age of 59. When you factor in the income tax, the penalty, and selling at market lows; you can see why financial planners want you to exhaust every other option first before attacking your retirement funds.
So while there are good reasons to temporarily adjust your monthly retirement contributions, make sure your retirement plan is positioned to rebound when the economy rebounds.