With
When interest rates were low, borrowing money to make up for a temporary shortfall was relatively easy and didn't come at such a price. That's changed. Credit card rates are
For some people, reducing retirement contributions temporarily or even borrowing from a 401(k) may be smarter than piling up high-interest debt. Yes, traditional personal wealth advice directs savers to "set it and forget it" when it comes to employer-sponsored retirement plans. But while I'm by no means encouraging people to be reckless with their 401(k)s, I do think some of the stigma and taboo around adjusting retirement savings when in financial straits needs to change.
Assuming cash-poor families have already done a budget review and cut unnecessary expenses, dialing back on retirement savings could be the least-painful short-term fix. Remember, there aren't annual reminders or enrollment periods for existing employees when it comes to 401(k) plans like there are when making elections for health benefits.
Most people set a contribution rate when they start a job and leave it there for years.
But sometimes, external circumstances warrant making a change for a period of time.
Beneficiaries won't get hit with a 50% penalty for not making withdrawals in 2021 and 2022 — an unexpected move by the IRS. But questions still remain.
The "least harmful" change to make is to reduce your 401(k) contribution amount. There are tentative signs some workers are already doing this. A recent report by T. Rowe Price shows how there was a
To me, that makes sense sometimes: Tweaking the percentage of your salary that's going to retirement may provide enough of a bump to deal with any short-term financial strain. The size of the increase you'll get is influenced by your salary and withholding amount, among other factors. (But keep in mind, you may have a bigger tax liability, too.) Bankrate.com has a
For those who are going down this path, it's crucial to limit how many months you'll be contributing less to avoid getting used to the pay bump. Pick a date to stop and remind yourself to increase your contributions again after that time.
In addition, plan to use future raises or bonuses to get back on track, says Mark Wilson, a certified financial planner in Irvine, California.
Also, if you're leaving any portion of an employer match on the table, you may want to reconsider making contribution changes — in that case, taking on debt, even if it's expensive, may be better than passing up free money.
Another word of caution: Make sure you're reducing or cutting contributions because you really need to, not because you're panicking about the stock market decline. While it feels counterintuitive, continuing to put money into your 401(k) while stocks are down will actually help you come out ahead.
The industry's first "financial advisor assessment score" is showing wealth managers how they stack up.
If a change in 401(k) contribution levels isn't enough, most plans will also give you the option to borrow from your retirement account. The rules vary based on an employer's plan, but
The most important caveat with a 401(k) loan is that if you leave your job, you'll typically have to repay it no later than when your taxes for that year are due. If you're unable to do so, the unpaid balance will be treated as a distribution and you'll be on the hook for income taxes as well as a 10% early withdrawal penalty if you're younger than 59½.
Notably, only 10% of 401(k) borrowers
The paper also points out how people may save more in their workplace-based savings plans if they feel like they're more flexible and liquid.
It's another reason why including a 401(k) in the discussion about what to do if you're strapped isn't always the worst thing in the world. Still, any tweaks to a retirement savings plan should really be thought of as a stopgap fix. Permanently reducing or suspending contributions will have dire consequences for retirement, especially if you're young and have years for returns to compound.
