How to Invest 401k Money Right Now
By Neal Frankle
Something that has come up a lot lately is the question of how to invest 401k assets. I’ve received a number of questions like this from clients lately and I think it’s a very good topic for discussion.
Jane from North Carolina told me that her monthly contributions seem to be swallowed whole by the market as soon as she adds the money. In other words, the market declines faster than she’s put money into her account. As a result, her account has dropped in value even though she’s putting money in. That didn’t seem right to her and as a result, she’s considering suspending her monthly contributions.
My advice is not to suspend the contributions. In fact, Jane should maximize her contributions – even if her employer stops matching. Here’s why.
First, Jane has a good 10 years (at least) before she retires. Once she retires, she’ll tap into her retirement account – but she wants to generate income during her retirement…and that means over her lifetime. In other words, she will withdraw the money over 30 years after she retires. I’m no expert at the new math, but the way I figure it, she wants to make sure that money lasts at least 40 years. So the question is, what is the best investment considering she has that time frame of 40 years? That’s the answer to how to invest 401k money…right?
What are the best investments that will likely do best over that time period? Probably equity funds. Not certainly, but probably. (Of course, the past is no guarantee of future results and you should consult your financial adviser before making any investments).
“But why should Jane put money into the market every month if she’s losing money?” you ask.
Because she’s buying shares at low prices, that’s why. Nobody knows when the market will recover. I know the economy is really terrible. I get it. But as much as your uncle or your “inner voice” tells you that the market is going to continue to drop, I am here to tell you that nobody knows. That includes your “inner voice.”
Jane should continue to contribute to her 401k because she is acquiring assets and shares at low prices. And when the market comes back, she’ll see all her shares rise.
It’s painful now, but I encourage Jane (and you) to take a sober look at these decisions without relying on emotions.
What about you? Have you considered suspending your contributions to your retirement plans? If so, do you agree or disagree with this advice?
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and what about those who only plan to work approx.2 more years?? I just increased my 403B contribution but perhaps I should put that money somewhre else even perhaps lowering my contribution from what the original contribution was?? would this money be better somewhere else??
This is a very very good question. I’ll assume that once you retire, you’ll start tapping into your 403(b) and then continue to do so for many many years. That being the case, an argument could be made for keeping that money invested in money market. That way, you’d build up a reserve and when you start making distributions, you could tap into that giving your other funds even more time over which to recover.
Make sense?