If you’re staring at your 401(k), you probably wonder, “Am I doing the right thing?” You’re not alone. In difficult economic times, Americans often struggle with this problem. While data shows that 70% of Americans contribute to retirement plans, participation varies across generations, highlighting just how widespread this problem is. So, unless you see the finish line, it’s easy to feel like you’re constantly running on a retirement treadmill.
As a CPA, I often hear this question. A subscriber, for example, once asked me;
“Hi Jeff, I’ve been racking my brain for a few months about what to do with my 401(k). Should I keep contributing? Do you have any advice or how else I should save that money? It’s scary not knowing what this economy is doing, and we are not rich by any means.”
I completely understand that fear. But here’s the truth: economic uncertainty is a constant. It’s not about if it will happen but how we navigate it. So, let’s explore your options and find a way forward.
Option 1: Do Nothing
You have $50,000 in your 401(k) when you’re 30. Even if you don’t contribute another dime, your investments earn 8% annually, and by the time you retire at 60, you’ll have over $500,000. That’s compound interest at work.
However, contributing $100 per month significantly increases that number. As a result, even in uncertain times, continuous contributions can yield long-term benefits.
You may want to keep in mind that the limit on 401(k) contributions for employees in 2025 will be $23,500, and for employers and employees together, it will be $70,000. Additionally, there are catch-up contributions;
- Those who are 50 to 59 years old or 64 or older can make an additional contribution of $7,500.
- Individuals ages 60 to 63 can contribute an additional $11,250 if their plan permits.
Option 2: Adjust Your Contributions
Regardless of your financial situation, you don’t have to stop contributing altogether if you are uneasy about the market. By reducing your monthly contribution amount, you can adjust your contributions. You can free up some cash for other financial goals while maintaining your long-term retirement savings.
Another strategy? Focus on maximizing your employer’s match. Contribute enough to receive your company’s match at the very least.
Option 3: Consider Alternative Investments
Consider diversifying your portfolio if you’re uncomfortable keeping all your eggs in one basket. Alternative investment options include;
- Paying off debt. By paying off high-interest debt, such as credit cards, student loans, or even your mortgage, you could save money on your 401(k). Having no debt is a huge advantage from a financial standpoint.
- Investing in a Roth IRA. With a Roth IRA, you can withdraw your money tax-free in retirement, giving you greater flexibility in the future.
- Opening a brokerage account. Investing outside a retirement account allows you to access your money without incurring early withdrawal penalties.
- Exploring real estate. You can also grow wealth by purchasing rental properties, Airbnb investments, or REITs (Real Estate Investment Trusts).
- Investing in yourself. Sometimes, the best investments aren’t in the stock market, but rather in education, certifications, and skills that increase your earning potential.
The Importance of Investing in Yourself
Investing in your own growth is one of the best financial moves you can make. Among the possibilities are;
- Returning to school for a career-boosting degree.
- Earning a professional certification that enhances your credibility.
- Starting a side business to generate additional income.
- Even therapy can help you improve your mentality and decision-making.
As a financial planner, I earned the CFP (Certified Financial Planner) designation. It was a significant investment in time and cost, but it ultimately paid off by enhancing my credibility and opportunities within the industry.
Controlling What You Can Control
The economy will always be uncertain. We cannot control interest rates, inflation, and stock market fluctuations. We can, however, control our strategy, patience, and discipline.
Rather than making panicked decisions, focus on the long-term. The market has survived recessions, crashes, and economic crises and has always recovered. One of the biggest mistakes you can make is letting short-term fears influence long-term decisions.
Final Thoughts
So, what should you do with your 401(k)? This depends on your financial goals, personal situation, and risk tolerance. However, here are some key points to consider;
- If you can keep contributing, do it. It doesn’t matter how small your contribution is; it adds up over time.
- If you need to pause or adjust contributions, that’s okay, too. However, you must have a plan in place.
- Explore other investments if you want more control. You can diversify your portfolio with a Roth IRA, a brokerage account, or real estate.
- Invest in yourself. Improving yourself, whether through education, skills, or mental health, can make a significant difference in your financial future.
Remember this: Don’t let short-term uncertainty derail your long-term goals. So, stay informed, stay patient, and focused on making your financial future and life awesome.
FAQs
What are the benefits of a 401(k)?
- Tax-deferred growth. In retirement, you don’t have to pay taxes on your investment earnings.
- Employer match. Employers often match your contributions, giving you free money.
- Retirement savings. With a 401(k), you can build an investment portfolio for retirement.
How much should I contribute?
Make at least enough contributions to qualify for a full employer match. Whenever possible, contribute the maximum amount that the IRS allows.
What are my investment options?
Mutual funds, stocks, and bonds are typically available as investment options in 401(k) plans. You should pick investments aligned with your risk tolerance and time horizon to make the most of your investments.
How should I manage my 401(k)?
- Leave it in your old plan. This is often the simplest option, but your investment choices may be limited, and fees may vary
- Roll it over into an IRA. This will give you more investment flexibility and may result in lower fees.
- Roll it over into a new employer’s 401(k). You might save more money if you consolidate your savings at your new job with a 401(k).
- Cash it out. This option is generally not preferred because of taxes and penalties.
What factors should I consider?
- Fees. You should compare the fees in your old plan, potential IRA providers, and your new employer’s plan.
- Investment options. Would you rather have a wide selection of options or a more limited selection?
- Age. Your age may affect your risk tolerance, so you should consider how long your money should last.
- Tax implications. Each option has tax implications, so be sure to understand them before making your decision.
What are the tax implications?
- Traditional 401(k). Withdrawals will be taxed in retirement.
- Roth 401(k). Taxes are paid on contributions now, but withdrawals in retirement are tax-free.
- IRA rollover. This is generally a tax-free event but talk with your tax advisor about your particular situation.
How do I decide what’s best for me?
- Evaluate your needs. Consider your age, risk tolerance, financial goals, and tax situation.
- Compare options. You should weigh the pros and cons of each option based on your individual needs.
- Seek professional advice. With a financial advisor’s help, you can get personalized advice and make the best decision.
Featured Image Credit: Photo by Pavel Danilyuk; Pexels
